A  HISTORY  OF 
.MODERN  BANKS  OF  ISSUE 


WITH  AN  ACCOUNT  OF  THE  ECONOMIC  CRISES 
OF  THE  PRESENT  CENTURY 


BY 
CHARLES  A.  CONANT 


FOURTH  IMPRESSION 


G.  P.  PUTNAM'S   SONS 

NEW  YORK  LONDON 

*7  WEST  TWENTY-THIRD   STREET  24   BEDFORD   STREET,  STRAND 

£|«  fjumhcrbockrr  $)r«ss 
1902 


PREFACE  TO  THE  SECOND  EDITION. 


THE  exhaustion  of  the  first  edition  of  the  "  History  of 
Modern  Banks  of  Issue,"  less  than  six  months  after 
its  publication,  is  one  among  many  proofs  of  the  inter- 
est taken  by  the  people  of  the  United  States  in  financial  sub- 
jects. The  banking  problem  was  not  directly  involved  in  the 
contest,  which  has  just  closed,  regarding  the  metallic  basis 
of  the  monetary  circulation.  The  relations  of  the  metallic 
standard  and  the  paper  currency  are,  however,  so  linked 
with  each  other  that  the  consideration  of  the  one  almost 
necessarily  involves  the  other.  The  decision  which  has  been 
made  by  the  majority  of  the  voters  in  favor  of  the  gold 
standard  is,  in  some  senses,  only  a  negative  decision,  and 
merely  clears  the  ground  for  the  radical  reforms  which  are 
needed,  in  order  to  place  our  currency  system  upon  a  scien- 
tific basis  and  make  it  responsive  to  the  legitimate  needs  of 
business.  The  financial  ills  from  which  the  United  States 
have  suffered  in  recent  years  cannot  be  permanently  cured 
by  a  political  victory  over  the  forces  of  discontent.  A  defec- 
tive currency  system  has  undoubtedly  been  one  among 
several  causes  which  have  contributed  to  recent  agitation, 
and  the  political  party  which  has  the  judgment  and  the 
courage  to  reform  the  system  will  do  much  to  commend 
itself  to  the  intelligent  support  of  the  American  people. 

The  changes  made  in  the  present  edition  of  this  book  are 
unimportant,  because  of  the  short  time  which  has  elapsed 
since  the  appearance  of  the  first  edition.  There  have  been 
few  changes  in  the  banking  laws  of  important  states  within 
the  past  six  months,  and  even  statistics  are  not  yet  available 


VI  PREFACE  TO  THE   SECOND  EDITION. 

for  a  later  year  than  1895.  The  more  serious  criticisms  of 
the  book  made  in  leading  newspapers  and  reviews  have  been 
directed  rather  to  the  brevity  of  the  discussion  of  banking 
principles  than  to  the  actual  contents  of  the  work.  These 
criticisms  would  have  force,  if  the  author  had  proposed  to 
develop  any  new  theories  of  banking.  It  was  his  more 
modest  purpose  to  record  the  simple  facts  regarding  existing 
banking  systems,  and  in  this  record  no  serious  errors  have 
thus  far  been  pointed  out. 

CHARLES  A.  CONANT. 
WASHINGTON,  Nov.  12,  1896. 


PREFACE. 


reason  for  being  of  this  work  is  the  growing  inter- 
:  est  in  the  United  States  in  financial  and  economic 
subjects  and  the  fact  that  they  promise  to  be  the 
paramount  issues  of  American  politics  for  many  years  to 
come.  My  purpose  has  been  to  bring  together,  in  compact 
form,  the  leading  facts  regarding  the  banks  of  the  world 
authorized  to  issue  circulating  notes  and  the  history  of  the 
financial  and  economic  crises  through  which  they  have 
passed.  There  is  no  work  in  English  covering  exactly  the 
ground  covered  by  the  History  of  Modern  Banks  of  Issue. 
The  materials  for  such  a  history  are  accessible  in  public 
records  as  well  as  special  works,  but  they  have  never  before 
been  brought  together  in  a  form  easily  accessible  to  the 
American  and  English  reading  public. 

The  functions  and  character  of  history  have  changed 
with  the  changes  in  the  character  of  national  development. 
The  historical  development  of  the  human  race  has  passed 
through  two  essential  stages  and  has  entered  upon  a  third. 
The  first  was  the  struggle  for  the  existence  of  civilization 
and  national  life  ;  the  second  was  the  struggle  for  the  legal 
and  political  freedom  of  the  individual  within  the  state  ; 
the  third  is  the  struggle  for  the  complete  development,  ac- 
cording to  sound  economic  laws,  of  the  producing  capacity  of 
the  community.  The  Muse  of  History  has  followed  no  un- 
reasoning whim  in  turning  her  pen  to  the  story  of  each  suc- 
cessive stage  of  the  world' s  progress.  In  the  first  stage  of  her 
work,  her  theme  was  the  history  of  nations  and  the  acts  of 
their  sovereign  powers.  In  the  second  stage,  the  history  of 


Vlii  PREFACE. 

value  to  the  community  became  the  history  of  the  people  and 
the  contest  for  popular  rights.  The  historians  of  each  age 
have  been  logical  in  looking  to  the  dominant  spirit  of  that  age. 

The  issue  of  the  present  and  of  the  immediate  future,— 
and  the  subject  with  which  the  Historic  Muse  must  most 
concern  herself, — is  the  best  means  of  developing  the  pos- 
sibilities of  individual  and  national  life.  This  issue  is 
essentially  an  economic  one  and  the  history  of  economic 
development  must,  in  the  very  nature  of  events,  be  in  future 
the  principal  study  of  practical  thinkers  and  workers.  The 
Massachusetts  Senator  who  declared  that  of  late  years  the 
American  people  had  given  "  too  much  attention,  perhaps, 
to  economic  questions,  and  too  little  attention  to  those  great 
and  far-reaching  questions  on  which  the  future  of  the  repub- 
lic depends,"  l  spoke  out  of  the  education  and  out  of  the 
political  theories  of  the  past  and  with  his  face  to  the  past 
rather  than  to  the  future.  The  pursuit  of  the  best  means 
of  increasing  wealth,  not  for  its  own  sake,  but  for  the  wider 
opportunities  of  intellectual  and  moral  development  which 
it  places  in  the  hands  of  the  community,  is  the  mission  of 
the  student  of  public  affairs  for  the  future,  and  the  public 
man  who  seeks  different  political  ends  subjects  himself  to 
the  judgment  pronounced  upon  himself  by  Lord  Stanley  a 
generation  ago,  that  he  was  brought  up  in  the  pre- scientific 
period.2 

Political  economy  is  still  in  a  large  measure  an  experi- 
mental and  a  disputed  field,  but  this  is  less  true  of  financial 
administration  than  of  the  questions  of  taxation  and  the  dis- 
tribution of  wealth,  which  still  perplex  economic  students. 
.The  modern  banking  community  have  already  learned,  dur- 
ing the  past  hundred  years  of  the  history  of  banking,  the 
leading  lessons  of  the  failures  and  experiments  of  that  period. 
There  is  doubtless  much  yet  to  be  learned,  but  the  system 
of  a  banking  currency  and  of  the  management  of  banking 
operations  is  now  a  practicable  and  workable  system.  The 

1  Congressional  Record,  Fifty-third  Congress,  Third  Session,  March 
2,  1895,  p.  3108. 

2  McCarthy,  I.,  31. 


PREFACE.  IX 

results  of  the  experiments  of  the  century  can  be  summed  up 
and  their  lessons  indicated  in  a  clear  and  certain  manner, 
subject  to  little  dispute  by  those  who  have  given  unpreju- 
diced study  to  the  subject.  It  is  these  experiments  which  I 
have  endeavored  to  describe  in  the  following  chapters,  leaving 
their  lessons  for  the  most  part  to  be  derived  from  a  compari- 
son of  their  results  with  the  rules  of  sound  banking  policy. 

The  purpose  of  this  work  is  historical  rather  than  contro- 
versial and  I  have  even  refrained  from  discussing  the  prob- 
lem of  the  single  or  double  standard,  because  the  rules  which 
govern  a  banking  currency  apply  with  equal  force,  whatever 
metal  constitutes  the  standard  money  of  redemption.  I 
have  thought  it  proper  to  state,  as  simply  and  as  clearly  as 
possible,  the  theory  of  a  banking  currency,  but  I  have  en- 
deavored to  avoid  all  digressions  which  were  not  essential  to 
an  understanding  of  the  history  of  banks  of  issue  and  of 
recent  events  in  the  financial  world.  Systems  of  coinage, 
the  history  of  public  loans  and  political  events,  the  many 
forms  of  mortgage,  deposit  and  popular  banks,  and  the  new 
problems  relating  to  the  uses  of  speculation  and  the  part 
played  by  negotiable  securities  in  modern  economic  life,  are 
such  important  subjects  of  discussion  that  each  is  worthy  of 
separate  treatment,  and  they  are  only  referred  to  here  where 
they  seem  to  form  a  necessary  part  of  the  history  of  one  of 
the  great  banks  of  the  world.  It  has  been  necessary  to 
refer  in  several  cases  to  the  history  of  government  paper 
money,  because  it  is  related  to  the  origin  and  growth  of 
banks  of  issue,  but  my  plan  excludes  the  systematic  treat- 
ment of  paper  money,  which  would  of  itself  fill  a  volume. 
My  chief  object,  beyond  that  of  a  narrator,  will  be  accom- 
plished if  the  study  of  the  dismal  record  of  government 
interference  with  monetary  laws  shall  convince  thinking 
Americans  of  the  axiomatic  truth  that — 

The  currency  of  a  commercial  country  should  be  regulated  by 
commercial  conditions  and  not  by  the  whims  of  politicians. 

CHARLES  A.  CONANT. 
WASHINGTON,  D.  C.,  April  i,   1896. 


I  beg  to  acknowledge  my  obligations  to  the  Hon.  William 
K.  Curtis,  Assistant  Secretary  of  the  Treasury  ;  to  the  Hon. 
James  H.  Eckels,  the  Comptroller  of  the  Currency  ;  and  to 
the  Hon.  Robert  E.  Preston,  the  Director  of  the  Mint,  for 
the  use  of  many  valuable  public  documents  of  foreign  coun- 
tries as  well  as  of  the  United  States  ;  to  them,  and  many  other 
officers  of  the  Treasury,  to  the  Hon.  Lewis  Sperry  of  Hart- 
ford, Conn.,  and  to  Mr.  L,.  Carroll  Root  of  New  York,  for 
many  helpful  suggestions ;  and  to  my  Secretary,  Miss  Flo- 
rence Johnson,  for  her  intelligent  assistance. 

Amounts  expressed  in  foreign  currency  in  the  following 
pages  are  reduced  only  to  round  sums  in  United  States 
money,  with  sufficient  frequency  to  afford  a  general  idea  of 
the  sums  dealt  with,  but  the  exact  equivalent  of  the  foreign 
monetary  unit  is  usually  stated  early  in  the  chapter  in  which 
it  appears. 

The  full  titles  of  the  leading  authorities  cited  will  be  found 
at  the  back  of  the  book. 

C.  A.  C. 


CONTENTS. 


CHAPTER  I. 

PAGE 

THE  THEORY  OF  A  BANKING  CURRENCY i 


CHAPTER  II. 
ANCIENT  AND  MODERN  BANKING  IN  ITALY      .        .       .        .21 

CHAPTER  III. 
J  BANKING  IN  FRANCE 38 

CHAPTER  IV. 
FIRST  CENTURY  OF  THE  BANK  OF  ENGLAND    ....      78 

CHAPTER  V. 
SECOND  CENTURY  OF  THE  BANK  OF  ENGLAND        .        .        .    100 

CHAPTER  VI. 
THE  SCOTCH  BANKING  SYSTEM 138 

CHAPTER  VII. 
BANKING  IN  IRELAND 167 

CHAPTER  VIII. 
-*  THE  BANKS  OF  GERMANY    .  182 


XIV  CONTENTS. 

CHAPTER  IX. 

PAGE 

THE  AUSTRO-HUNGARIAN  BANK  ......      209 

CHAPTER  X. 
THE  BANK  OF  RUSSIA  .........    235 

CHAPTER  XI. 
THE  BANKS  OF  NORTHERN  EUROPE  ......    250 

CHAPTER  XII. 
THE  BANKS  OF  SOUTHERN  EUROPE    ......    268 

CHAPTER  XIII. 
THE  BANK  OF  THE  UNITED  STATES  ......    286 

CHAPTER  XIV. 
THE  STATE  BANKING  SYSTEMS  I 


CHAPTER  XV. 
THE  NATIONAL  BANKING  SYSTEM      ......    348 

CHAPTER  XVI. 
THE  CANADIAN  BANKING  SYSTEM      ......    386 

CHAPTER  XVII. 
THE  BANKS  OF  LATIN  AMERICA         ......    4x3 

.  CHAPTER  XVIII. 
BANKING  IN  AFRICA  AND  THE  EAST         .....    432 


CHAPTER  XIX. 
CRISES  AND  THEIR  CAUSES 453 

' 


CONTENTS.  XV 
CHAPTER   XX. 

S  PAGE 

THE  EARLY  CRISES  OF  THE  CENTURY 467 


CHAPTER  XXI. 
THK  LATER  CRISES  OF  THE  CENTURY 492 

CHAPTER  XXII. 
THE  CRISIS  OF  1893 524    ^ 

CHAPTER  XXIII. 
THE  ADVANTAGES  OF  A  BANKING  CURRENCY  ....    554 

LIST  OF  AUTHORITIES 577 


HISTORY  O™3&ERN  BANKS 
OF  ISSUE. 


CHAPTER  I. 

THE  THEORY  OF  A  BANKING  CURRENCY. 

The  Distinction  between  Batik-notes  and  Money— The  Functions  of 
Currency  as  a  Standard  of  Value  and  Medium  of  Exchange — The 
Mechanism  of  a  Bank  of  Issue — Do  Note  Issues  Create  Capital? — 
Importance  of  Redemption  in  Coin  on  Demand — The  Necessity 
for  Quick  Assets — The  Operation  of  the  Rate  of  Interest  and  the 
Foreign  Exchanges  on  the  Volume  of  Circulation — Difficulty  of 
"  Cornering  "  Money  under  Free  Banking. 

IT  is  the  purpose  of  this  work  to  give  the  outlines  of  the 
history  of  the  leading  banks  of  issue  in  the  world  and 
their  methods  of  doing  business,  and  incidentally  to  set 
forth  the  principles  and  uses  of  a  banking  currency.  Bank- 
ing can  be  done  without  the  issue  of  bank-notes,  but  they 
are  an  important  factor  in  the  development  of  the  use  of 
capital  and  afford  the  best  currency  for  general  uses.  In 
their  capacity  as  a  circulating  medium,  bank-notes  have 
come  to  be  confused  with  money  and  have  attained  in  the 
minds  of  many  a  special  and  official  character  different  from 
that  of  other  commercial  paper.  The  examination  of  the 
history  of  banks  of  issue,  as  well  as  of  the  theory  of  a  bank- 
ing currency,  will  serve  to  show  the  gradual  development  of 
the  use  of  bank-notes  as  a  means  of  transferring  credit  and  the 
part  they  play  in  commercial  transactions  alongside  of  other 


2  HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

forms  of  credit  which  differ  from  them  only  in  degree  of 
negotiability. 

The  creation  and  regulation  of  a  banking  currency  are 
based  upon  the  theory  that  bank-notes  are  a  convenient 
means  of  giving  mobility  to  capital.  There  are  two  impor- 
tant truths  which  should  be  clearly  understood  at  the  outset 
of  the  discussion  of  banking  and  paper  currency.  They  are  : 

1.  That  bank-notes  are  not  money. 

2.  That  bank-notes  are  a  form  of  credit  and  are  of  substan- 
tially the  same  nature  as  bills  of  exchange,  promissory  notes, 
and  checks. 

The  distinction  between  bank-notes  and  money  is  of  prime 
importance  for  the  purposes  of  economic  study  and  from  the 
standpoint  of  legislation,  if  not  always  important  in  daily 
transactions.  It  will  be  convenient,  however,  first  to  point 
out  what  bank-notes  are,  before  considering  what  they  are 
not.  It  will  be  convenient  also  to  state  broadly,  in  the 
beginning,  the  theory  of  a  banking  currency  and  of  free 
banking,  as  a  theory,  before  dealing  with  certain  limitations, 
for  the  purpose  of  promoting  uniformity  and  security,  which 
experience  and  sound  judgment  may  suggest  in  practice. 

Bank-notes  are  the  proper  instruments  of  commercial 
transactions  because  they  are  the  creatures  of  commercial 
needs  and  are  adapted  in  volume  and  use  to  commercial 
necessities.  In  this  respect  they  differ  from  government 
paper  money,  which  is  regulated  wholly  by  the  necessities 
of  governments  and  not  by  the  convenience  of  trade.  Bank- 
notes are  substantially  similar  to  checks  and  bills  of  ex- 
change, because  they  are  simply  the  paper  representatives 
of  credit.  In  the  language  of  Prof.  Bonamy  Price  : 

A  seller  by  taking  the  bank-note  makes  himself  the  creditor  of  the 
government  or  bank,  and  is  willing  to  part  with  his  property,  sub- 
stantially, on  credit  to  the  state  or  bank.  He  finds  in  this  debt,  now 
due  to  him,  of  the  issuer  of  the  bank-note  a  sufficient  guarantee  for 
being  able  to  buy  with  it  other  goods.  .  .  .  Every  buyer  with  a 
note  virtually  says,  "  I  have  no  money  ;  give  me  the  goods  and  I  will 
tell  a  good  man  who  owes  me  money  to  pay  you  for  me."  ' 

1  Currency  and  Banking,  42-43.  The  character  of  a  bank-note  is 
clearly  and  simply  defined  by  Prof.  Charles  F.  Dunbar,  professor  of 


THE  THEORY  OF  A   BANKING   CURRENCY.  3 

Those  who  insist  that  gold  and  silver  constitute  the  only 
proper  medium  of  financial  transactions  do  not  clearly  distin- 
guish the  two  essential  functions  of  currency.  These  func- 
tions are  the  creation  of  a  standard  of  value  and  the  provision 
of  a  means  of  exchange.  It  is  only  in  the  fulfilment  of  the 
first  function  that  exchange  value  is  required  in  the  material 
of  which  the  currency  is  made.  The  fulfilment  of  the 
second  function  requires  only  that  the  currency  shall  repre- 
sent value,  rather  than  that  it  shall  contain  value  in  itself.1 
A  bank-note  currency  represents  the  value  bound  up  in 
commodities  which  are  in  process  of  production  and  ex- 
change. The  essential  function  of  business  operations  is  the 
production  and  exchange  of  commodities  for  each  other, — 
not  the  exchange  of  barren  heaps  of  metal  for  each  other  nor 
of  commodities  for  metal.  The  intervention  of  gold  and 
silver  in  such  exchanges  adds  nothing  to  the  sum  of  produc- 
tion and  is  not  necessary  to  carry  them  on,  except  as  the 
metals  afford,  with  paper,  a  convenient  tool  of  exchange 

political  economy  in  Harvard  University,  as  follows  :  "  The  bank-note 
is  the  duly  certified  promise  of  the  bank  to  pay  on  demand,  adapted 
for  circulation  as  a  convenient  substitute  for  the  money  which  it 
promises.  It  is  issued  by  the  bank,  and  can  be  issued  only  to  such 
persons  as  are  willing  to  receive  the  engagement  of  the  bank  in  this 
form  instead  of  receiving  money,  or  instead  of  being  credited  with  a 
deposit."  —  Theory  and  History  of  Banking,  16. 

1  It  is  difficult  to  get  away  from  the  term  "  intrinsic  value,"  in  the 
terms  of  ordinary  discussion,  in  spite  of  the  well-reasoned  demonstra- 
tion of  Prof.  Macl,eod  that  value  is  a  relation  based  upon  exchange 
rather  than  an  inherent  quality. — Elements  of  Banking,  12.  Gold 
and  silver,  strictly  speaking,  are  not  only  limited  to  an  exchange 
value,  but  they  perform  to  a  large  extent,  by  the  convention  of  civil- 
ized nations,  the  same  functions  in  monetary  uses,  as  representatives 
of  value,  as  bank-notes  and  other  commercial  instruments.  Roscher 
illustrates  the  fact  that  even  the  currency  of  gold  as  money  rests  in  a 
measure  upon  credit.  "The  person  who  takes  money  as  such  must 
always  harbor  the  hope  of  being  able  to  dispose  of  it  again  as  money. 
.  .  .  The  savage  Goahiros,  between  Rio  de  la  Hacha  and  Mara- 
caibo,  are  too  '  distrustful '  to  take  anything  in  trade  but  commodities 
fit  for  the  most  immediate  use." — Political  Economy,  I.,  351.  The 
refinement  in  the  use  of  credit  is  a  pretty  accurate  measure  of  na- 
tional economic  progress. 


4  HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

and,  by  themselves,  a  standard  and  common  denominator 
by  which  exchanges  are  measured.  Bank-notes  are  not,  as 
government  paper  money  usually  is,  pieces  of  paper  created 
out  of  nothing  to  represent  value.  They  are  simply  the 
paper  representatives  of  a  great  mass  of  mercantile  trans- 
actions. They  are  the  convenient  counters  by  which  men 
carry  on  exchanges.  The  presence  of  gold  and  silver  is  a 
necessary  element  in  these  exchanges  only  for  the  purpose 
of  applying  the  test  of  a  common  and  fixed  standard,  and 
this  is  secured  for  bank-notes  by  the  condition  that  they 
shall  be  redeemable  in  standard  coin  on  demand. 

The  entire  fabric  of  a  bank  of  issue  constitutes  a  harmoni- 
ous whole.  The  capital  subscribed  by  the  stock-holders  at 
once  becomes  a  liability  and  provides  the  bank  with  cash 
for  making  loans  and  keeping  a  coin  reserve.  The  issue  of 
notes  enables  the  bank  to  furnish  accommodation  to  the 
holders  of  good  commercial  paper  by  covering  the  paper 
Into  its  assets  and  treating  the  notes  as  demand  liabilities. 
A  bank  of  issue,  therefore,  has  on  one  side  its  liability  to  its 
stock-holders  for  their  invested  capital  and  its  liability  to 
its  note-holders  to  pay  coin  on  demand.  It  has  on  the  other 
side,  as  its  resources,  the  cash  derived  from  subscriptions  to 
the  capital  and  the  commercial  paper  payable  in  cash  by  its 
makers  at  maturity.  When  deposits  are  received  in  cash  or 
paper  convertible  into  cash,  the  proceeds  can  be  employed  to 
enlarge  the  scope  of  the  discounts.  The  obligation  to  pay 
the  deposit  becomes  a  liability,  but  the  cash  deposited  fur- 
nishes assets  of  equal  volume  as  an  offset.  Most  of  the 
great  banking  institutions  of  the  world  have  begun  busi- 
ness, and  many  of  them  continue  it  to-day,  upon  their  capi- 
tal and  their  loans  and  with  but  a  small  proportion  of  cash 
deposits. 

The  volume  of  notes  which  a  bank  may  issue,  when  not 
directly  limited  by  law,  is  determined  by  a  prudent  relation 
between  the  issues  and  the  coin  reserve.  The  greater  part 
of  the  cash  received  in  capital  and  deposits,  over  and  above 
the  coin  reserve,  is  available  for  loans  and  discounts.  Loans 
as  distinguished  from  discounts  are  actual  advances  of  money 


THE  THEORY  OF  A    BANKING   CURRENCY.  5 

upon  negotiable  securities.  They  usually  constitute  a  smaller 
proportion  of  the  transactions  of  a  bank  in  a  commercial 
city  than  the  commercial  discounts.  These  are  simply  pur- 
chases by  the  bank  of  commercial  paper,  carrying  the  right 
to  collect  money  at  some  future  time.  The  wholesale  mer- 
chant, for  instance,  receives  from  his  retail  customer  a  pro- 
missory note  or  bill  of  exchange,  covering  the  cost  of  goods 
he  has  sold,  payable  sixty  or  ninety  days  from  date.  By 
taking  this  note  or  bill  to  the  bank  the  wholesaler  obtains 
currency  at  once  for  the  amount  contracted  to  be  paid,  less 
an  interest  charge  which  is  known  as  discount.  The  busi- 
ness of  a  bank  of  issue  is  simply  to  transform  the  bill  of 
exchange,  which  is  itself  a  negotiable  security,  into  another 
sort  of  negotiable  security.  For  this  purpose  it  issues  bank- 
notes. In  the  concise  language  of  an  eminent  French  finan- 
cial writer  : 

The  bank  bill  is  a  promise  to  pay  a  fixed  sum  at  sight  or  to  bearer. 
In  promising  to  pay  at  sight,  the  difficulty  is  avoided  of  maturity  at  a 
fixed  term  and  the  bearer  is  relieved  of  the  limitations  which  result 
from  it.  By  the  promise  to  pay  to  bearer,  one  gets  rid  of  the  embar- 
rassment of  endorsements,  protests,  recourse,  etc.  One  obtains  by 
this  means  a  security  always  negotiable,  to  which  suffices  a  signature 
generally  known  and  in  some  degree  public  to  make  it  equally 
accepted  and  demanded,  even  in  preference  to  metallic  money.1 

The  bank  by  the  issue  of  notes  gives  mobility  to  capital  in 
several  ways.  It  enables  the  holder  of  a  bill  of  exchange 
to  put  it  to  active  use  instead  of  locking  it  up  against  the 
time  of  its  maturity.  The  wholesaler  or  manufacturer,  by 
paying  a  small  commission  to  the  bank  upon  such  a  bill,  is 
able  to  obtain  in  advance  the  use  of  capital  in  negotiable  form 
to  which  he  would  otherwise  not  become  entitled  for  several 
months.  He  is  enabled  to  obtain  it  not  only  in  advance  of 
the  time  it  would  otherwise  be  due,  but  in  such  form  that  he 
can  split  it  into  small  amounts  and  pay  a  part  for  his  raw 
materials,  a  part  for  his  labor,  and  a  part  for  his  personal 
expenditures.  The  issue  of  bank-notes  also  enables  small 
depositors  to  combine  their  capital  in  the  hands  of  the  bank, 

1  Courcelle-Seneuil,  102. 


6  HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

so  that  it  becomes  available  for  constant  use.  This  is  one  of 
the  great  advantages  of  modern  banking,  that  it  brings  out 
into  the  light  and  into  the  current  of  the  processes  of  pro- 
duction the  capital  which  would  otherwise  be  locked  up  in 
idle  hoards.  The  bank-note  is  a  loan  from  the  holder,  but 
a  loan  which  costs  him  nothing  and,  on  the  contrary,  affords 
him  the  benefit  of  security,  convenience,  and  negotiability 
for  his  capital.  In  the  sense  in  which  government  paper 
money,  made  by  law  a  legal  tender  for  the  payment  of  debt, 
is  a  forced  loan,  for  non-commercial  uses,  upon  the  produc- 
tive forces  of  the  community,  the  bank-note,  which  is  not 
forced  legal  tender,  is  a  voluntary  loan,  for  commercial  uses, 
which  tends  to  bring  into  play,  for  the  mutual  benefit  of 
borrowers  and  lenders,  the  full  efficiency  of  those  productive 
forces. l 

The  simple  statement  of  the  theory  of  a  banking  currency 
shows  how  absurd  it  is  to  imprison  the  volume  of  circulating 
notes  within  fixed  limits,  or  to  condition  their  issue,  when 
they  are  kept  in  circulation  at  par  with  coin,  upon  any  other 
specific  thing  than  the  amount  of  loanable  capital."^  The 
Bank  of  England  is  limited  in  its  note  issues,  beyond  a  fixed 
amount,  by  the  Bank  Act  of  1844,  to  deposits  of  gold  coin 
or  bullion,  with  the  result  that  there  is  an  annual  autumnal 
stringency  in  the  money  market.2  There  have  been  repeated 
periods  of  business  paralysis  when  every  possible  substitute 
has  been  employed  to  make  up  for  the  deficiency  of  circu- 
lating notes,  and  the  limitation  itself  has  been  finally  sus- 
pended in  every  acute  crisis  as  the  only  means  of  averting 
universal  bankruptcy.  The  banks  of  issue  of  the  United 
States  are  required  to  purchase  evidences  of  the  national 
debt  and  are  allowed  in  circulation  only  ninety  per  cent,  of 


1  Exactly  the  opposite  view  was  urged  by  some  of  the  early  oppo- 
nents of  the  Bank  of  England.     Davenant  declared  that  the  effort  to 
attract  deposits  by  the  offer  of  four  per-cent.  interest  was  a  hindrance 
to  energy  and  enterprise.     Rogers,  18.     This  view  overlooked  the  fact 
that  the  money  would  be  loaned  by  the  bank  for  active  use. 

2  V.  Jevons,  Investigations  in  Currency  and  Finance,  Ch.  v.,  160-93, 
— "  The  Frequent  Autumnal  Pressure  in  the  Money  Market." 


THE   THEORY  OF  A    BANKING   CURRENCY.  7 

the  face  value  of  these  securities,  with  the  result  that  as  the 
debt  has  been  reduced,  the  bank-note  circulation  has  de- 
clined. The  securities  have  reached  an  enormous  premium 
as  they  have  become  scarce,  and  the  bank-note  circulation 
has  fallen  from  $354,408,008  on  June  30,  1875,  to  $211,600,- 
698  on  June  30,  1895,  while  loans  and  discounts,  which  indi- 
cate the  volume  of  business,  have  more  than  doubled.  The 
public,  under  these  circumstances,  have  looked  to  other 
sources  than  the  banks  for  a  circulating  medium  and  found 
it,  until  the  repeal  of  the  purchasing  clause  of  the  Sherman 
law,  in  purchases  of  silver  bullion,  by  the  Treasury,  and  the 
issue  of  government  paper  money  in  payment  for  the  bullion. 
This  circulation  proved  absolutely  irresponsive  to  the  de- 
mands of  business  and  resulted,  after  periods  of  great  strin- 
gency in  the  autumn  of  1890  and  the  summer  of  1893,  in 
a  long  period  of  redundancy  and  gold  exports  during  1894 
and  1895.  The  experience  of  both  England  and  the  United 
States  in  this  respect  justifies  the  judgment  of  those  who 
believe  that  the  circulating  medium  should  be  based  upon  the 
general  assets  of  the  banks  and  governed  by  business  condi- 
tions rather  than  based  upon  extraneous  securities  and 
governed  by  their  fluctuations  in  quantity  or  value. 

The  theory  of  a  banking  currency,  as  here  defined,  is  in 
accordance  with  the  "  banking  principle,"  which  is  approved 
by  most  bankers  and  writers  upon  political  economy.  There 
is  another  theory  of  bank-note  issues,  described  in  Eng- 
land under  the  name  of  "  the  currency  principle,"  upon 
which  the  law  governing  the  circulation  of  the  Bank  of 
England  is  based.  The  essential  difference  between  the  two 
theories  is,  that  "  the  banking  principle  "  regards  bank-notes 
as  similar  to  other  commercial  paper  and  their  volume  as  prop- 
erly subject  to  business  requirements,  while  "  the  currency 
principle"  regards  bank-notes  as  performing  the  functions 
and  possessing  substantially  the  character  of  actual  money 
and  their  volume  as  properly  subject  to  regulations  which 
will  cause  it  to  change  in  the  same  manner  as  a  circulation 
entirely  of  coin.  The  failure  of  this  principle  to  operate  as 
expected  by  its  supporters  in  the  case  of  the  Bank  of  Eng- 


8  HISTORY  OF  MODERN  BANKS   OF  ISSUE. 

land  will  be  set  forth  in  the  chapter  relating  to  the  later 
history  of  that  bank.  The  theory  is  not  applicable  where 
credit  exists  in  any  form,  and  its  advocates  have  never  suc- 
ceeded in  advancing  any  substantial  reason  for  assimilating 
bank-notes  to  coined  money,  except  the  fact  that  they  enter, 
like  money,  into  general  circulation.  This  fact  justifies 
certain  regulations  to  secure  uniformity  and  safety,  but  the 
regulations  should  be  the  same  in  kind  as  those  which  gov- 
ern other  commercial  paper  and  evidences  of  indebtedness. 

There  is  no  reason  why  the  number  of  bank-notes  should 
be  limited  any  more  than  other  commercial  paper,  except  by 
the  requirement  of  redemption  in  coin  on  demand  which 
serves  as  a  test  of  their  value  and  the  solvency  of  their 
issuers.  A  bank  authorized  to  issue  circulating  notes  occu- 
pies, substantially,  the  position  of  a  corporation  or  business 
firm, — the  circulation  of  its  notes  depends  upon  its  reputa- 
tion for  solvency  and  honesty.  Government  regulations 
requiring  a  mutual  guarantee  or  the  formation  of  a  common 
safety  fund  may  enable  the  notes  to  pass  from  hand  to  hand 
without  inspection  as  to  the  particular  institution  putting 
them  in  circulation,  but,  even  in  such  a  case,  the  validity 
of  the  notes  depends  upon  the  solvency  and  resources  of 
the  united  body  of  issuers,  if  not  upon  that  of  the  indi- 
vidual issuer. 

Prof.  H.  Dunning  MacL,eod,  an  acute  and  brilliant  writer 
upon  the  laws  of  banking,  undertakes  to  show  that  the 
issue  of  instruments  of  credit  is  in  itself  the  creation  of 
capital.  He  brings  many  arguments  to  the  support  of  his 
position,  but  his  strongest  argument  is  a  legal  rather  than 
an  economic  one.  He  shows  plainly  enough  that  there  is  an 
essential  distinction  in  law  between  the  personal  deposit 
(depositum)  secured  by  a  warehouse  receipt,  entitling  the 
holder  to  the  return  of  the  specific  goods  deposited,  and  the 
creation  of  a  debt  (muiuum},  by  which  the  lender  is  simply 
entitled  to  the  return  of  some  equivalent,  but  not  the  specific 
thing  entrusted  to  the  borrower.  The  claim  in  the  first 
case  is  specific,  and  possession  of  the  article  may  be  recovered 
by  a  writ  of  replevin,  but  it  constitutes  in  the  other  case  only 


THE   THEORY  OF  A    BANKING  CURRENCY.  9 

a  general  claim  against  the  entire  assets  of  the  borrower. 
Professor  MacLeod  is  doubtless  right,  as  a  proposition  of 
mathematics  or  of  law,  in  his  demonstration  that  the  new 
obligations  created  by  evidences  of  debt  are  not  properly 
set  off  against  specific  property  in  the  hands  of  the  debtor. 
The  holder  of  a  bank-note  for  ten  dollars  has  no  claim 
against  any  specific  ten  dollars  in  the  cash  drawer  of  the 
bank  ;  he  simply  has  a  legal  claim  for  an  equivalent  for 
the  amount.1 

But  Professor  MacLeod,  in  his  subtle  argument  upon  this 
subject,  confuses  the  domains  of  law  and  mathematics  with 
the  domain  of  economics.  Political  economy  looks  deeper 
than  legal  distinctions  and  looks  to  the  substance  behind 
algebraic  formulae.  The  creation  of  paper  credit  from  this 
point  of  view  is  not  an  addition  to  existing  capital.  It 
greatly  assists  in  the  movement  of  capital  and,  in  individual 
cases,  the  creator  of  paper  credit  may  obtain  the  use  of  more 
capital  than  he  possesses,  but  in  every  such  case  he  simply 
obtains  the  use  of  the  capital  of  some  other  person  or  body 
of  persons.  Barring  the  question  of  the  incorporeal  wealth 
arising  from  mental  culture,  economics  deal  with  tangible 
property.  Negotiable  securities  represent  tangible  property, 
either  in  the  possession  of  the  issuers  or  in  the  possession  of 
the  holders  of  the  securities  who  are  willing  to  advance  their 
capital  for  the  promotion  of  some  enterprise.  The  individ- 
ual who  borrows  beyond  the  limits  of  his  tangible  capital 
simply  obtains  the  use  of  some  other  person's  capital.  In 
the  words  of  Professor  Emile  de  Laveleye : 

1  The  legal  distinction  is  important  enough  to  a  correct  compre- 
hension of  the  laws  of  banking  to  justify  giving  it  in  Prof.  MacLeod's 
own  words  :  "The  essential  feature  of  a  '  Banker'  is,  that  when  his 
customers  pay  in  money  to  their  accounts,  they  cede  the  property  in  the 
money  to  the  Banker.  The  money  placed  with  him  is  not  a  Deposi- 
tum,  or  Bailment ;  but  it  is  a  Mutuum  :  it  is  a  Loan,  or  Sale,  directly 
to  himself.  The  '  Banker  '  buys  the  money  from  his  customer  ;  and 
in  exchange  for  it,  he  gives  his  customer  a  Credit,  or  Right  of  action 
to  demand  back  an  equivalent  amount  of  money  at  any  time  he 
pleases  ;  which  Right  of  action  he  is  also  at  liberty  to  transfer  to 
any  one  else  he  pleases."— Theory  and  Practice  of  Banking,  I.,  319. 


IO  HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

Credit  seems  to  multiply  capital  because  by  the  side  of  the  thing 
due  appears  the  promise  which  gives  a  right  to  its  possession  ;  but  in 
fact  there  are  not  two  things, — one  is  only  the  shadow  of  the  other. 
Burn  every  evidence  of  credit ;  nothing  real  would  cease  to  exist. 
Juridicial  relations  only  are  changed.  The  creditors  lose  exactly 
what  the  debtors  gain.1 

A  bank  of  issue,  therefore,  creates  no  new  capital  when  it 
issues  its  notes  to  the  amount  of  its  assets  available  beyond 
its  coin  reserve.  It  simply  takes  the  titles  to  capital  which 
have  been  transferred  to  its  custody  and  loans  them  to  its 
customers  in  the  form  of  negotiable  paper.  This  paper, 
under  a  system  of  free  banking,  differs  in  no  respect,  except 
its  greater  degree  of  transferability,  from  personal  promissory 
notes  and  bills  of  exchange.  The  bank,  whether  by  its 
intrinsic  reputation  or  by  the  requirements  of  certain  uniform 
laws,  simply  affords  a  definite  and  well-known  security  and  a 
uniform  style  of  note  paper  which  add  to  the  convenience 
of  the  business  community. 

Banking  can  be  done  without  the  issue  of  circulating  notes, 
and  is  done  to  a  large  extent  in  the  greatest  commercial 
centres,  simply  by  the  use  of  checks.  Checks  came  into 
extensive  use  in  England  as  a  means  of  transferring  credit 
when  the  Bank  of  England  was  given  by  law  the  substantial 
monopoly  of  the  issue  of  circulating  notes.  The  use  of  checks 
of  other  instruments  of  credit  than  bank-notes  usually 
obtains  the  widest  development  where  the  modern  commer- 
cial system  of  credit  and  of  business  has  attained  if  highest 
form.  As  Professor  Dunbar  forcibly  says  of  this  medium  of 
exchange : 


1  Elements  &  Economic  Politique,  221.  If  Prof.  MacLeod's  theory 
is  correct,  the  estimates  of  aggregate  national  wealth  should  be 
obtained  by  adding  to  the  ascertained  value  of  corporate  property  the 
face  or  market  value  of  the  securities  which  represent  it,  and  in  this 
way  the  country  in  which  "  stock  watering"  prevailed  to  the  greatest 
extent  would  be  that  possessing  the  most  wealth.  Prof.  MacLeod 
himself  says,  "that  a  nation  can  spend  its  money  in  destroying  its 
enemies  and  have  it  too  as  bank-notes,  or  currency,  is  a  wild  and  mis- 
chievous delusion." — Theory  and  Practice  of  Banking,  II. ,  267. 


THE   THEORY  OF  A    BANKING   CURRENCY.  II 

Of  the  entire  circulating  medium  of  this  country  it  forms  incom- 
parably the  greatest,  although  the  least  considered,  part.  Depending 
for  its  efficiency  solely  upon  convention  and  issued  as  well  by  private 
firms  as  by  incorporated  banks,  it  for  the  most  part  eludes  the  regu- 
lations which  legislatures  so  industriously  enforce  upon  the'  other 
constituents  of  the  currency.  Indeed,  beyond  the  requirement  of  a 
minimum  reserve  to  be  held  by  incorporated  banks,  made  by  the  law 
of  the  United  States,  we  may  say  that  the  subject  is  not  touched  by 
legislation,  in  this  country  or  elsewhere.  The  necessity  for  payment 
in  specie  upon  demand,  which  is  the  most  important  safeguard  of 
value,  is  the  result  of  the  general  provision  for  the  payment  of  debts 
of  any  kind.1 

The  essential  question  for  every  one  who  believes  in 
developing  the  productive  powers  of  the  community  to  their 
utmost  limit  is  the  best  method  of  giving  mobility  to  capital 
in  that  community.  Checks  and  book  credits  are  valuable 
and  essential  instruments  of  modern  commerce,  but  they 
cannot  always  be  so  readily  introduced  into  general  use  as 
bank-notes  may  be.  The  difference  is  wholly  one  of  the 
business  habits  of  a  community,  of  its  business  necessities 
and  of  the  development  of  banking.  The  governing  prin- 
ciple of  banking  is  that  mobility  should  be  given  to  capital 
by  the  best  means  which  will  be  accepted  by  the  community. 
Bank-notes  afford  this  means  in  new  countries  and  those  in 
which  banking  is  undeveloped. 

There  is  no  more  risk  in  the  issue  of  bank-notes  within 
fixed  legal  proportions  to  capital  or  assets,  when  they  are 
redeemable  in  coin  on  demand,  than  in  drawing  checks  or 
bills  of  exchange.  There  is  no  more  danger  of  the  inflation 
of  values  or  of  the  volume  of  money,  for  the  two  transactions 
are  essentially  the  same.  The  question  of  the  solvency  or 
soundness  of  the  bank  and  its  paper  issues  is  in  both  cases 
chiefly  one  of  good  banking.  Inflation  by  bank-note  issues, 
when  banks  are  required  by  law  and  by  commercial  custom 
to  redeem  their  notes  in  coin  on  demand,  is  not  conceivable 
in  any  such  sense  as  inflation  by  means  of  government 
paper  money,  issued  without  regard  to  the  demands  of  busi- 
ness and  incapable  of  contraction  with  the  diminution  of 
those  demands. 

1  Theory  and  History  of  Banking,  44-45. 


12  HISTORY   OF  MODERN  BANKS  OF  ISSUE. 

The  inflation  of  paper  credit  is  one  of  the  evils  of  the 
structure  of  modern  industry  and  banking  which  forms  a 
drawback  to  its  manifold  benefits,  but  bank-notes  as  such 
have  never  played  more  than  a  subsidiary  part  in  such  in- 
flation. The  evil  arises  from  the  abuse  of  credit,  from  the 
sinking  of  capital  in  unproductive  enterprises,  from  specula- 
tive risks,  and  from  over-sanguine  calculations  which  some- 
times result  in  unsound  banking.  But  unsound  banking 
is  not  especially  connected  with  the  issue  of  bank-notes 
and  has  occurred  again  and  again  with  banks  of  mere 
discount  and  deposit  and  with  banks  like  that  of  Ham- 
burg, which  held  coin  to  the  full  value  of  their  circulat- 
ing notes.  The  crisis  of  1893  in  the  United  States  is 
the  most  recent  illustration  that  such  incidents  are  rarely 
due  to  the  abuse  of  bank-note  issues.  The  bank-note 
currency  was  then  restricted  to  the  trifling  proportion 
of  about  one-eighth  of  the  entire  monetary  circulation 
of  the  country  and  was  less  than  for  many  years  before. 
Nearly  every  decade  of  the  past  century  has  witnessed  a 
commercial  crisis,  but  in  no  case  could  it  be  traced  to  the 
over-issue  of  bank-notes  convertible  into  coin  on  demand. 
The  speculative  mania  has  ebbed  and  flowed,  but  bank- 
notes have  not  been  the  cause  of  either  ebb  or  flood  unless 
where  coin  redemption  was  suspended  in  fact  or  by  the  in- 
tervention of  law.  So  complete  is  the  evidence  that  bank- 
note issues  have  not  been  an  essential  factor  in  causing 
fluctuations  in  prices  and  collapses  of  credit  that  Mr.  Tooke, 
the  eminent  English  economic  student,  after  painstaking  in- 
vestigation declared  : 

In  point  of  fact  and  historically,  as  far  as  my  researches  haTTe  gone, 
in  every  signal  instance  of  a  rise  or  fall  in  prices,  the  rise  or  fall  has 
preceded,  and  therefore  could  not  be  the  effect  of,  an  enlargement  or 
contraction  of  the  bank  circulation.1 

The  touchstone  of  a  sound  banking  currency  is  redemp- 
tion in  standard  coin  on  demand.  A  bank  with  authority 
to  suspend  coin  redemption  and  with  no  limit  upon  its  issues 
is  in  the  position  of  an  individual  authorized  to  write  notes 
"^Quoted  by  Mill,  B.  III.,  Ch.  xxiv.,  Sec.  I. 


THE   THEORY  OF  A    BANKING   CURRENCY.  13 

and  contract  debts  without  any  obligation  to  keep  them 
related  to  his  purse  and  property.  Redemption  in  coin  on 
demand  constitutes  the  essential  soundness  of  a  banking 
currency  and  keeps  a  bank  tied  strictly,  even  if  there  is  no 
limit  of  law  upon  its  note  issues,  to  its  available  assets.  A 
bank  should,  therefore,  keep  a  coin  reserve  constantly  in  its 
vaults  to  pay  depositors  who  desire  coin  and  to  redeem  its 
circulating  notes.  This  proportion  is  sometimes  reckoned 
at  one-third  of  the  demand  liabilities,  but  is  often  permitted 
by  law  to  be  less  and  is  often  required  by  prudent  banking 
to  be  more.  "The  intensity  of  the  liability,"  in  the  lan- 
guage of  Mr.  Bagehot,  is  to  be  considered  as  well  as  the 
amount,  and  "  the  cardinal  rule  is,  that  errors  of  excess  are 
innocuous,  but  errors  of  defect  are  destructive."  ' 

But  a  bank  must  have  other  quick  assets  than  its  coin  re- 
serve, for  if  it  keeps  too  large  a  proportion  of  its  assets  in 
idle  coin  it  will  make  no  profit,  and  if  it  keeps  too  large  a 
proportion  in  investments  which  cannot  be  quickly  turned 
into  cash  it  will  have  no  means  of  replenishing  its  reserve 
in  case  of  necessity.  The  demands  of  a  crisis  or  even  a  tem- 
porary change  in  the  financial  situation  often  make  it  neces- 
sary for  a  banking  institution  to  redeem  a  large  part  of  its 
note  issues  in  cash,  to  pay  off  depositors  in  cash,  and  to  con- 
tract at  once  the  volume  of  its  issues  and  its  discounts.  The 
character  of  these  obligations  requires  that  banks  of  issue 
should  deal  almost  exclusively  in  commercial  paper  running 
for  short  terms.  So  long  as  universal  insolvency  is  averted, 
the  holding  of  such  paper — running  in  most  banking  sys- 
tems no  longer  than  three  months — affords  the  bank  an 

1  Lombard  Street^  Works,  V.,  195,  208.  It  may  prove  advisable  to 
concentrate  the  actual  coin  holdings  in  the  hands  of  a  few  strong 
banks,  whose  notes  are  substituted  for  coin  in  redemptions  by  the 
smaller  banks,  but  that  is  a  question  of  detail  which  need  not  be  con- 
sidered here.  The  essential  point  is  that  there  shall  be  an  ultimate 
coin  reserve  somewhere,  upon  which  the  circulation  of  all  the  banks 
actually  rests.  In  the  English  system  the  Bank  of  England  holds  the 
ultimate  gold  reserve  of  the  entire  country,  and  Bank  of  England 
notes  are  a  legal  tender  everywhere  but  at  the  bank,  where  they  must 
be  redeemed  in  gold. 


14  HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

easy  control  over  its  resources  and  liabilities.  If  danger 
threatens  by  the  diminution  of  the  cash  reserve,  liabilities 
can  be  reduced  by  the  restriction  of  new  discounts  until  the 
reserve  accumulates  by  the  payment  of  maturing  paper.  If 
the  terms  of  maturity  are  scanned  with  sufficient  care  to 
secure  something  like  an  even  distribution  day  by  day  and 
week  by  week,  the  command  of  the  bank  over  its  resources 
is  practically  complete.  The  restriction  of  new  discounts 
for  a  few  days  and  the  collection  of  maturing  debt  will 
change  the  relations  between  liabilities  and  assets  at  the 
same  time  that  this  policy  acts  in  a  broader  way  to  reduce 
the  outstanding  circulation  and  influence  the  rates  of  foreign 
exchange. 

The  only  safe  rule  for  a  bank  of  issue,  which  is  compelled 
to  redeem  its  notes  in  coin  on  demand,  is  to  keep  a  large 
proportion  of  its  assets  in  a  form  in  which  they  can  be 
quickly  turned  into  cash.  It  is  when  this  rule  is  violated 
by  loans  on  doubtful  paper,  which  have  to  be  continued  in- 
stead of  being  paid  at  maturity,  or  by  loans  on  real  estate 
and  in  industrial  enterprises,  which  tie  money  up  for  long 
terms,  that  banks  of  issue  find  their  cash  exhausted  and  are 
driven  into  insolvency.  Next  in  value  to  coin  and  com- 
mercial paper  as  quick  assets,  therefore,  are  good  negotiable 
securities.  These  securities  in  ordinary  times  can  be  quickly 
sold  without  loss  in  the  stock  markets  and  turned  into  cash 
to  swell  the  reserve.  It  is  true  that  crises  have  occurred  so 
acute  that  even  the  public  stocks  found  for  a  moment  no 
ready  market,  but  these  occasions  have  been  the  result  of  a 
temporary  blind  terror,  against  which  the  most  perfect  sys- 
tem of  banking  yet  devised  has  not  been  sufficient  to  guard, 
and  they  have  never  lasted  beyond  a  few  days  or  weeks.1 

1  It  was  found  in  New  York  City  in  the  panic  of  1873  that  loans  on 
commercial  paper  for  short  terms  were  more  available  than  loans  on 
call  or  collateral.  The  call  loans  could  not  be  paid  by  the  brokers 
and  the  value  of  the  stocks  deposited  as  collateral  shrunk  so  rapidly 
that  they  could  not  be  sold  for  enough  to  cover  the  loans.  The  credit 
of  the  makers  of  commercial  paper  stood  the  strain  better  and  their 
obligations  were  found  more  valuable  for  the  moment  than  those  of 
the  brokers. — Bolles,  III.,  349-50. 


THE   THEORY   OF  A    BANKING   CURRENCY.  I  5 

The  necessity  of  redeeming  notes  on  demand  is  the  reason 
why  no  currency  based  upon  land  or  property  has  ever  been 
kept  permanently  at  par  with  coin.  Mortgage  banks  and 
finance  companies  are  legitimate  forms  of  business  enter- 
prise, but  they  are  not  capable  of  doing  the  business  of  a 
bank  of  issue.  The  assets  are  available  only  at  long  inter- 
vals and  cannot  be  quickly  converted  into  cash  in  an  emer- 
gency. Several  of  the  leading  banks  of  issue  in  Europe  and 
many  such  banks  in  the  United  States  do  a  certain  amount 
of  mortgage  business,  but  it  is  usually  limited  to  a  small 
proportion  of  their  aggregate  transactions  and  in  many  cases 
is  restricted  by  law  to  a  fixed  percentage  of  the  capital.  The 
two  leading  banking  institutions  of  Belgium  early  in  the 
present  century  and  the  banks  of  Italy  and  Australia  more 
recently  violated  this  rule  of  separating  their  note  issue  busi- 
ness from  their  long  term  loans  and  were  forced  to  the  sus- 
pension of  specie  payments  as  the  result.1 

The  necessity  of  redemption  of  bank-notes  in  coin  on  de- 
mand is  closely  related  to  the  regulation  of  the  volume  of 
the  currency  and  a  stable  system  of  values.  A  surplus  of 
redeemable  bank  currency  instantly  corrects  itself.  Deposi- 
tors who  found  themselves  burdened  with  surplus  bank-notes 
would  take  them  to  the  bank  for  transfer  to  their  deposit 
accounts.  Those  issued  by  the  depositor's  bank  would  be 
covered  into  its  own  vaults  and  could  not  be  issued  again  in 
any  case  until  there  was  a  demand  for  loans  and  discounts. 
Those  of  other  banks  would  be  returned  to  them,  under  any 
proper  law,  for  redemption.  This  would  be  done  by  clearing- 
house arrangements,  which  might  not  in  every  case  call  for 

1 M.  Courcelle-Seneuil  (211)  very  properly  suggests  that  "when  a  bank 
of  circulation  is  well  established,  it  may  consider  its  minimum  of  cir- 
culation as  a  permanent  deposit  and  make  investments  for  long  terms 
with  the  capital  of  this  deposit."  Where  reasonable  confidence  ex- 
ists in  the  banking  system,  the  coin  reserve  is  much  more  likely  to  be 
drawn  upon  by  the  withdrawal  of  deposits  than  by  the  direct  presenta- 
tion of  notes  for  redemption,  and  this  has  to  be  reckoned  with  by  the 
banker.  What  is  stated  in  the  text  is,  of  course,  only  the  outline  of 
the  theory  of  a  banking  currency  and  is  subject  to  many  modifica- 
tions consonant  with  sound  banking. 


1 6  HISTORY  OF  MODERN  BANKS   OF  ISSUE. 

transfers  of  coin,  but  would  in  every  case  involve  the  return 
of  the  notes  to  the  issuing  bank  and  their  withdrawal  from 
circulation.  The  currency  would  be  promptly  contracted, 
without  the  expression  of  any  distrust  by  the  business  com- 
munity and  without  even  the  knowledge  by  an  individual 
depositor  of  bank-notes  that  others  as  well  as  himself  found 
their  supply  of  bank-notes  in  hand  larger  than  usual.  The 
operation  would,  indeed,  be  so  completely  automatic  that 
the  redundancy  could  never  reach  any  considerable  propor- 
tion of  the  outstanding  issues  and  an  unusual  issue  of  cur- 
rency in  response  to  a  special  demand  would  be  promptly 
followed  by  contraction,  when  the  demand  ceased,  without 
intentional  concert  of  action  or  any  change  in  the  usual 
practices  of  the  business  community.  If  a  crisis  were  con- 
ceivable which  made  the  currency  so  redundant  as  to  arouse 
distrust,  the  banks  themselves  would  become  the  most  pow- 
erful agencies  in  bringing  it  again  within  the  proper  limits. 
If  they  found  their  notes  coming  in  not  only  for  deposit,  but 
for  redemption  in  coin,  they  would  take  immediate  measures 
to  restrict  issues  and  husband  their  coin.  If  they  had  been 
slow  in  forwarding  the  notes  of  other  banks  for  redemption, 
they  would  forward  them  promptly  when  the  accumulation 
became  rapid,  and  if  they  had  been  indifferent  about  de- 
manding settlement  of  balances  in  standard  coin,  they  would 
insist  upon  that  right. 

The  requirement  of  a  sound  banking  currency,  that  the 
notes  issued  shall  be  redeemable  in  standard  coin  on  demand, 
has  another  purpose  than  the  mere  test  of  the  solvency  of 
the  banks.  It  goes  to  the  foundation  of  the  economic  and 
financial  system  of  the  country  and  regulates  its  commercial 
relations  with  other  countries.  This  result  is  reached  through 
the  medium  of  foreign  exchange,  which  operates  to  main- 
tain an  equality  of  distribution  of  money  among  different 
communities  and  to  keep  their  merchandise  markets  in  touch 
with  each  other.  Metallic  money  is  the  money  of  the  world 
and  of  international  exchange.  A  redundancy  in  one  coun- 
try brings  about  changes  in  the  condition  of  the  loan  market 
which  correct  the  redundancy  and  have  an  influence  upon 


THE   THEORY  OF  A    BANKING   CURRENCY.  I/ 

interest  and  prices.  It  is  not  necessary  to  maintain  the  old 
theory  that  prices  are  governed  by  the  volume  of  metallic 
money  or  credit  paper  in  order  to  show  that  a  redundancy  of 
the  circulating  medium  corrects  itself  through  the  foreign 
exchanges.  As  John  Stuart  Mill  acutely  remarked  a  gene- 
ration ago,  when  this  subject  was  less  clearly  understood 
than  at  present :  "  It  is  a  fact  now  beginning  to  be  recog- 
nized, that  the  passage  of  the  precious  metals  from  country 
to  country  is  determined  much  more  than  was  formerly  sup- 
posed, by  the  state  of  the  loan  market  in  different  countries, 
and  much  less  by  the  state  of  prices." 

It  is  only  within  the  last  half-century  that  the  manner  of 
controlling  the  exchanges  has  come  to  be  thoroughly  under- 
stood. It  is  necessary,  to  a  proper  understanding  of  the  sub- 
ject, to  treat  metallic  money  as  a  commodity  and  to  apply 
to  it  the  laws  of  supply  and  demand  which  govern  other 
commodities.  In  the  words  of  Professor  MacLeod  : 

"Discounting  a  bill  for  a  merchant  is  not  lending  him  money  but 
buying  a  debt  due  to  him  :  and  the  price  of  such  debt  must  follow  ex- 
actly the  same  laws  as  the  price  of  corn,  or  any  other  article.  If 
money  is  very  scarce,  and  wheat  very  abundant,  the  price  of  wheat 
must  fall ;  if  money  is  very  abundant,  the  price  of  wheat  will  rise. 
The  price  of  debts  obeys  the  same  rules.  If  money  becomes  very 
scarce,  the  price  of  debts  must  fall,  i.e.,  the  discount  must  rise.  If 
specie  becomes  abundant,  the  price  of  debts  will  rise,  i.e.,  the  dis- 
count will  fall.  The  price  of  debts,  then,  must  follow  the  same  great 
laws  of  nature  that  the  price  of  wheat  does."  2 

This  proposition,  simple  enough  to  the  modern  banking 
community,  was  only  imperfectly  understood  and  tardily 
acted  upon  down  to  1860.  The  Bank  of  England  then  for 
the  first  time,  at  the  suggestion  of  Mr.  Goschen,  adopted 
the  principle  of  sharply  raising  the  rate  of  discount  one  per 
cent,  at  a  time  when  gold  began  to  leave  the  country.  The 
effect  was  marvellous  and  the  method  then  adopted  has  since 
been  followed,  with  more  or  less  halting  steps,  by  every 
banking  institution  in  the  world  when  it  has  been  threatened 

1  Political  Economy,  B.  III.,  Ch.  viii.,  Sec.  4. 
*  Theory  and  Practice  of  Banking,  II.,  278. 


1 8  HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

by  a  drain  of  bullion.  The  effect  of  offering  a  higher  price 
for  money  is  to  attract  money  while  compelling  the  sale  of 
commodities.  It  is  not  so  much  that  commodities  fall 
because  the  mere  volume  of  the  circulating  medium  has 
been  reduced,  according  to  the  theory  of  the  classical  school 
of  political  economy.  It  is  rather  because  the  price  of  money 
having  been  raised  by  those  who  have  it  to  sell  in  the  form 
of  loans,  the  manufacturer  or  owner  of  merchandise  prefers 
to  sell  his  goods  at  a  reduced  price  rather  than  pay  the 
higher  rate  of  discount  for  continued  accommodation  at  the 
bank. 

The  folly  of  attempting  to  maintain  a  uniform  rate  of 
interest  or  discount  is  on  a  par  with  maintaining  a  uniform 
price  of  wheat.  At  times  the  price  would  be  too  high  and 
the  wheat  of  the  world  would  glut  the  markets  of  the  coun- 
try enforcing  such  a  law,  diverting  the  capital  which  might 
have  been  expended  for  other  commodities  and  resulting  in 
artificial  relations  between  wheat  and  all  other  articles.  At 
other  times  the  price  would  be  too  low  and  wheat  would  flow 
steadily  to  the  countries  paying  the  market  price,  while 
starvation  would  stalk  through  the  country  which  maintained 
a  fixed  legal  price.  Money  is  governed  by  exactly  the  same 
laws.  The  attempt  to  maintain  a  uniform  rate  of  interest 
or  discount  would  result  in  some  cases  in  a  glut  of  bullion, 
when  the  ruling  rate  of  the  world  was  lower,  which  would 
be  as  real  an  inflation  and  as  unhealthy  an  expansion  of  credit 
as  any  form  of  paper  inflation  ;  it  would  result  in  other 
cases,  when  the  ruling  rate  of  the  world  was  higher,  in  the 
withdrawal  of  all  the  bullion  which  a  country  possessed. 

A  banking  currency,  regulated  by  sound  laws  and  the 
enlightened  experience  of  modern  banking,  affords  as  perfect 
a  regulator  of  the  monetary  circulation  as  the  automatic 
governor  of  a  steam  engine.  When  capital  is  redundant,  it 
flows  into  the  banks  in  the  form  of  deposits  of  bank-notes 
and  of  coin.  The  bank-notes  are  cancelled  and  retired  and 
if  the  redundancy  of  capital  continues  the  rate  of  discount 
falls  and  the  surplus  is  available  for  domestic  or  foreign 
investments.  Domestic  industry  is  thus  able  to  revive  after 


THE   THEORY  OF  A    BANKING   CURRENCY.  19 

a  commercial  crisis  as  the  result  of  the  low  rates  for  idle 
capital.  The  surplus  of  currency  which  is  not  thus  absorbed 
goes  abroad  in  the  form  of  bullion.  The  moment  such 
losses  of  bullion  go  too  far  and  put  a  strain  upon  the  coin 
reserves  of  the  banks,  their  rate  of  discount  is  raised.  This 
has  the  triple  effect  of  retaining  capital  at  home  which  would 
otherwise  be  exported,  attracting  capital  from  abroad,  and 
putting  a  check  upon  speculative  enterprises  upon  small 
margins.  Money  becomes  harder  to  get  and  it  is  not  gotten 
for  so  many  doubtful  enterprises  or  for  those  promising  small 
and  distant  returns. 

Money  and  capital  are  regulated  by  the  law  of  supply  and 
demand,  like  other  commodities.  They  pay  smaller  percent- 
ages of  profit,  as  a  rule,  than  other  commodities  and  there  is 
no  danger  that  they  can  be  cornered  or  monopolized.  Capi- 
tal is  a  generic  thing  which  can  be  acquired  by  any  one  who 
saves.  In  this  it  differs  from  specific  commodities,  which 
may  require  special  methods  of  production  and  which  can  be 
made  the  subjects  of  monopoly.  The  conception  which  has 
sometimes  taken  possession  of  the  opponents  of  a  banking 
currency,  that  capital  and  money  can  be  "cornered,"  is  an 
absolute  chimera  under  a  system  of  free  banking.  Banking 
systems  have  been  in  force  which  have  had  a  tendency  to 
restrict  the  supply  of  money  because  of  the  conditions  they 
imposed  upon  the  quick  conversion  of  capital  into  negotiable 
form  ;  but  just  so  far  as  a  banking  system  is  free  it  escapes 
the  possibility  of  such  an  evil,  whatever  others  it  may  bring 
in  its  train.  The  theory  that  all  bankers  and  persons  capable 
of  becoming  bankers  could  or  would  form  a  combination  to 
raise  the  value  of  money  when  it  was  plentiful  is  the  same 
in  substance,  and  is  as  reasonable,  as  the  theory  that  all 
holders  of  capital  would  cease  to  make  promissory  notes, 
draw  checks,  and  grant  credits  on  their  books.  The  form 
which  this  theory  usually  takes,  that  a  banking  currency 
would  encourage  the  "  cornering  "  of  money  more  than  a  gov- 
ernment paper  currency,  is  peculiarly  ill-considered,  because 
the  amount  of  the  latter  is  fixed  and  cannot  be  increased 
without  awaiting  the  slow  process  of  legislative  action,  which 


20  HISTORY  OF  MODERN   BANKS  OF  ISSUE. 

usually  involves  also  the  suspension  of  specie  payments  and 
the  upsetting  of  the  standards  of  value.  The  only  way  of 
"cornering"  money  is  by  raising  the  interest  rate.  The 
moment  this  rate  was  raised  above  that  fixed  by  free  compe- 
tition in  the  markets  of  the  world,  foreign  capital  would 
pour  into  the  country  where  this  condition  existed  in  a 
golden  stream  of  coin  and  bullion,  interest  rates  would 
begin  to  fall  again,  and  the  "corner"  would  more  quickly 
collapse  than  has  ever  been  the  case  in  the  wheat  or  cotton 
market. 

It  is  not  to  be  inferred  from  what  has  preceded  that  no 
regulation  of  banks  of  issue  by  law  is  justified  or  required. 
The  theory  of  free  banking  simply  assumes  that  equal  privi- 
leges shall  be  granted  to  all  banks  which  comply  with  uni- 
form and  reasonable  conditions.  The  contest  which  has 
been  waged  in  France  and  some  other  European  countries 
on  behalf  of  free  banking  has  not  been  waged  against 
proper  government  supervision  of  banks  of  issue,  but  against 
the  grant  of  the  privilege  of  monopoly  of  issues  to  a  single 
institution  or  a  limited  number  of  institutions.  Government 
regulation  of  institutions  owned  entirely  by  private  individ- 
uals is  a  very  different  thing  from  government  ownership, 
and  the  exercise  of  such  supervision  under  a  banking  system 
open  to  all  comers  who  comply  with  reasonable  requirements 
is  very  different  from  its  exercise  over  a  single  institution, 
holding  special  privileges  by  grant  of  the  sovereign  power. 
The  essential  limitation  upon  government  supervision  of 
banking  is  that  it  shall  restrict  as  little  as  possible,  consonant 
with  the  safety  of  the  business  public,  the  full  operation  of 
the  functions  of  the  bank.  It  may  be  justifiable  to  impose 
fixed  proportions  between  capital  and  note  issues  and  between 
liabilities  and  the  normal  cash  reserve  ;  to  provide  specific 
methods  of  keeping  accounts  and  to  authorize  full  govern- 
ment inspection  of  such  accounts  ;  but  legal  regulation 
should  allow  as  much  elasticity  as  possible  in  the  full  use  of 
the  powers  of  the  bank  in  times  of  emergency  for  the 
accommodation  of  solvent  business  men  and  the  protection 
of  the  community  from  needless  panics. 


CHAPTER  II. 

ANCIENT    AND    MODERN    BANKING   IN   ITAI<Y. 

Character  of  the  Ancient  Banks— Origin  of  the  Word  "  Bank  "—The 
Banks  of  the  Italian  States— The  Unification  of  the  Banking 
System — The  Paper  Money  Mania  and  the  Present  Economic 
Condition  of  Italy — Flight  of  Subsidiary  Silver  to  Other  Coun- 
tries. 

ITAL,Y  is  in  a  sense  the  mother  of  modern  banking,  as  she 
is  also  the  inspiration  of  much  that  is  best  in  modern 
literature,  art,  and  religious  faith.  The  oldest  bank  is 
generally  considered  to  have  been  that  of  Venice,  founded 
during  the  wars  which  the  island  republic  was  waging  with 
the  Roman  Empire  of  the  East  and  its  successor  and  rival, 
the  Holy  Roman  'Empire  of  the  West.  The  Bank  of  Venice, 
however,  was  at  the  outset  simply  a  transfer  office  for  the 
national  debt.  Several  forced  loans  had  been  contracted, 
the  first  apparently  in  1156,  which  were  converted  into  per- 
petual annuities,  paying  an  annual  interest.  The  govern- 
ment appointed  commissioners  to  consolidate  these  loans 
and  to  issue  stock  certificates  or  credits.  This  constituted 
the  evidences  of  the  debt  into  registered  negotiable  secu- 
rities, which  were  transferred  from  time  to  time  on  the 
books  of  the  bank  and  thus  served  certain  purposes  of 
exchange  in  the  same  manner  that  such  securities  serve  at 
the  present  time.  The  actual  business  of  deposit  banking 
by  the  issue  of  circulating  notes  was  not  undertaken  by 
public  authority  in  Venice  until  four  centuries  later,  in 
1587,  when  foreign  coins  were  received  at  their  bullion  value 
and  certificates  were  issued  promising  a  return  of  bullion  of 

21 


22  HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

the  same  value  of  standard  weight  and  fineness.1  The  Bank 
of  Venice  proper  (Banco  del  Giro}  was  established  by  decree 
of  the  senate  in  1619. 2  The  origin  of  the  word  "  Bank,"  is 
traceable,  however,  to  the  form  of  business  done  by  the 
Venetian  loan  office,  and  for  this  reason  it  deserves  some 
attention  as  the  origin  of  modern  banking. 

One  of  the  names  of  a  public  loan  in  Italy  was  Monte,  or 
joint-stock  fund,  and  the  first  Venetian  loan  was  called  the 
Jlfonte  Vecchio,  or  old  loan,  in  contrast  with  the  later  ones, 
called  Monte  Nuovo,  and  Monte  Nuovissimo  (new  and  new- 
est). The  Germans  were  influential  in  Italy  at  this  time  and 
their  word  for  Monte  was  Banck,  which  the  Italians  con- 
verted into  Banco.  The  word  bank, was  frequently  used  in 
Knglish  as  well  as  Italian  to  signify  a  mass  of  money  or  a 
joint  stock  fund.  The  definition  given  in  an  Italian  dic- 
tionary in  1659  is,  "Monte,  a  standing  bank  or  mount  of 
money,  as  they  have  in  divers  cities  of  Italy."  *  The  issue 
of  paper  money  directly  by  the  state  was  spoken  of  as  "  rais- 
ing a  Banke  "  in  colonial  days  in  Massachusetts,  the  word, 
"bank,"  standing  for  the  money  rather  than  the  institution 
which  put  it  in  circulation.4  Blackstone  also  says  that  at 
Florence  in  1344,  "government  then  owed  about  ,£60,000, 
and  being  unable  to  pay  it,  formed  the  principal  into  an 
aggregate  sum,  called,  metaphorically  a  Mount  or  Bank,  the 
shares  whereof  were  transferable,  like  our  stocks."  The 
use  of  the  word,  therefore,  if  not  the  methods  of  modern 
banking,  comes  from  the  institutions  of  Venice,  Florence 
and  Genoa,  which  were  at  the  outset  the  registry  offices  of 
the  public  debt. 

The  Bank  of  Genoa  grew  out  of  the  pledge  of  the  public 
revenues  for  the  loans  contracted  to  carry  on  the  wars  of  the 
fourteenth  century.  The  lenders  were  permitted  to  receive 
the  produce  of  the  taxes  by  their  own  collectors,  paying  into 

1  Gilbert,  I.,  n,  note. 
2Palgrave,  103. 

3  MacLeod,  Theory  and  Practice  of  Banking,  L,  315. 

4  Weeden,  318. 

6  Commentaries,  I.,  327. 


ANCIENT  AND   MODERN  BANKING  IN  ITALY.      23 

the  Treasury  the  excess  above  their  claims.  The  multi- 
plicity of  these  claims  led  to  the  formation  in  1407  of  the 
Bank  of  St.  George,  which  became  from  that  time  the  sole 
intermediary  between  the  State  and  its  creditors.  Every 
senator  on  taking  office  swore  to  maintain  the  privileges  of  the 
bank,  which  were  confirmed  by  the  Pope  and  the  German  Em- 
peror. "The  bank,"  says  Hallam,  "interposed  its  advice 
in  every  measure  of  government  and  generally,  it  is  ad- 
mitted, to  the  public  advantage.  It  equipped  armaments  at 
its  own  expense,  one  of  which  subdued  the  island  of  Cor- 
sica ;  and  this  acquisition,  like  those  of  our  great  Indian 
corporation,  was  long  subject  to  a  company  of  merchants, 
without  any  interference  of  the  mother  country."  '  This 
territory  was  taken  by  way  of  security  for  the  loan,  in  the 
same  manner  that  revenues  from  specific  sources  are  still 
pledged  by  second-rate  powers  in  Europe  and  Asia  for  the 
fulfilment  of  their  pledges. 

The  forerunners  of  modern  loan  and  deposit  banks  were 
the  private  bankers  of  the  Italian  cities  who  lent  money  to 
traders,  merchants,  and  kings.  The  Jews  were  the  money 
lenders  of  the  dark  ages  and  their  monopoly  of  the  business 
was  confirmed  among  the  Christians  by  an  absurd  prejudice 
against  lending  money  at  interest,  upon  the  ground  that  it 
constituted  usury.2  The  Jews  were  several  times  expelled 
from  the  leading  countries  of  Western  Europe,  and  as  early 
as  the  thirteenth  century  the  Christian  merchants  of  L,om- 


1  Europe  during  the  Middle  Ages,  II.,  530. 

2  Prof.  Jannet  points  out  that  the  prejudice  against  loans  at  interest 
was  not  without  its  justification  before  money  came  to  be  borrowed 
for  the  purposes  of  production,  because  the  proceeds  of  the  loan  were 
usually  consumed  instead  of  multiplied,  and  if  loans  at  interest  had 
been  universally  approved  they  would  soon  have  resulted  in  rural 
localities  in  the  practical  enslavement  of  the  peasants  who  were  un- 
able to  pay.     The  distinction  between  loans  for  production  and  for 
consumption  was  early  recognized  by  the  Church,  and  the  fifth  Lateran 
Council  (1512-17)  decreed:     " Ea  est  propria  usurarum  interpretatio, 
quando  videlicet  ex  usu  rei  quae  non  germinat  nullo  labore,  nullo 
sumptu,  nullove  periculo  lucrum  foetusque  conquiri  studetur." — Le 
Capital,  la  Speculation,  et  la  Finance,  81. 


24  HISTORY  OF  MODERN  BANKS   OF  ISSUE. 

bardy  and  the  South  of  France  took  up  the  business  of 
remitting  money  by  bills  of  exchange  and  of  lending  at  in- 
terest. Bills  of  exchange  proved  peculiarly  useful  to  the 
Church  of  Rome  by  facilitating  the  remission  to  Italy  of  the 
immense  sums  subscribed  by  the  faithful  beyond  the  Alps, 
and  Italian  bankers  penetrated  to  England  and  were  allowed 
to  farm  the  customs  as  security  for  their  loans.1  Edward 
III.  defaulted  in  his  payments,  owing  the  Bardi  at  Florence 
900,000  gold  florins,  and  the  Peruzzi  600,000  florins.  These 
two  great  banking  houses,  who  were  described  by  Villani  as 
the  pillars  which  sustained  a  great  part  of  the  commerce  of 
Christendom,  were  obliged  to  suspend,  and  their  failure 
carried  down  a  great  number  of  Florentine  citizens  and 
caused  great  distress  in  the  city. 

The  essential  feature  of  modern  banks  of  issue — the  cir- 
culation of  notes  payable  to  bearer  and  redeemable  in  coin, 
but  only  partly  covered  by  the  coin  reserve, — was  not 
worked  out  until  the  seventeenth  century.  The  famous 
Bank  of  Amsterdam,  founded  in  1609,  was — like  the  Bank  of 
Venice,. after  it  really  became  a  bank  at  all, — a  mere  issuer 
of  warehouse  receipts  for  coin.  The  foundations  of  the 
great  structure  of  modern  credit  were  already  being  laid 
among  private  citizens  and  money  lenders,  but  had  not  at- 
tained their  present  form.  That  property  might  be  trans- 
ferred by  paper  representatives  was  demonstrated  by  the 
immemorial  use  of  bills  of  exchange,  and  the  perception  of 
this  truth  led  to  the  many  crude  schemes  of  banking  upon 
landed  security  which  formed  the  basis  of  Law's  bubble 
under  the  French  monarchy,  led  the  American  colonies 
through  every  form  of  monetary  folly,  and  deceived  for  a 
moment  even  the  sane,  clear  mind  of  Hamilton.  William 
Potter,  in  his  Key  to  Wealth?  groped  towards  the  modern 
theory  of  bank  issues  in  the  suggestion  that  greater  mobility 
should  be  given  to  trade  by  some  firm  and  known  security 


1  Hallam,  II.,  529.     The  Bardi  are  said  to  have  farmed  all  the  cus- 
toms in  England  in  1329  for  ^20  per  day. 

2  Published  in  London  in  1650. 


ANCIENT  AND   MODERN  BANKING   IN  ITALY.      2$ 

and  that,  failing  a  new  supply  of  gold  and  silver,  a  flag  or 
sign  of  specie  might  be  instituted.  He  grasped  the  concep- 
tion of  some  of  the  best  modern  thinkers  in  the  statement 
that  ' '  Money  is  given  to  men  for  their  commodities,  upon 
no  other  accompt  than  as  an  Evidence  or  Testimony  (That  is 
as  it  were  a  Token  or  Ticket)  to  signifie  how  far  forth  other 
men  are  indebted  for,  and  ingaged  to  recompence  the  fruits 
of  their  labors,  or  possessions  by  commodities  of  some  other 
kind,  instead  of  those  that  for  such  money  they  parted 
with."  China  had  paper  money  as  early  as  the  seventh 
century,  but  the  transport  notes  of  the  Stockholm  bank, 
issued  in  1661  to  avoid  the  transportation  of  copper  coin, 
are  considered  the  earliest  type  of  modern  bank-notes.1 
With  the  progress  of  the  arts  of  peace,  the  private  bankers, 
the  great  banks  of  Italy,  and  the  Bank  of  Amsterdam  thus 
gradually  perfected  the  methods  of  clearing  by  credits  on 
their  books,  while  the  great  incorporated  banks  provided 
credit  with  its  potent  modern  instrument — the  bank-note 
payable  in  coin  on  demand. 

But  it  is  the  purpose  of  this  work  to  deal  with  modern 
banks  of  issue  and  not  with  the  antiquities  of  mediaeval 
commerce.  The  disorders  which  came  on  the  heels  of  the 
French  Revolution,  wiping  out  the  boundaries  of  states  and 
destroying  the  freedom  of  the  Italian  cities,  put  an  end  also 
to  most  of  the  ancient  banks.  The  only  one  which  survived 
was  a  land  and '  mortgage  bank  called  Monte  dei  Paschi,  at 
Sienna,  which  was  believed  to  date  back  to  the  seventeenth 
century.  The  first  effort  to  found  a  modern  bank  was  made 
at  Genoa  upon  the  foundations  of  the  old  Bank  of  St.  George. 
The  effort  was  not  successful,  and,  in  the  opinion  of  M. 
Courcelle-Seneuil,  this  is  not  to  be  regretted,  "  for  the  Bank 
of  St.  George  was  adapted  to  customs  and  commercial  usages 
which  have  ceased  to  exist."  The  next  attempt  to  establish 
a  banking  system  in  Piedmont  was  made  by  letters  patent 
of  King  Charles  Albert,  under  date  of  March  16,  1844.  The 
new  bank  was  to  be  known  as  the  Bank  of  Genoa,  to  have  a 


1  Roscher,  I.,  443. 


26  HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

capital  of  4,000,000  lires  ($800,000),  and  to  be  under  the 
supervision  of  a  royal  commissioner  and  sub-commissioner. 
The  bank  received  a  subvention  of  4,000,000  lires  from  the 
government  during  1846  and  the  following  years,  upon 
which  it  paid  interest  at  two  per  cent.  A  bank  was  founded 
at  Turin  on  October  16,  1847,  with  a  capital  of  4,000,000 
lires,  but  the  political  and  economic  crisis  of  1848  checked 
its  development.  A  royal  ordinance  of  December  14,  1849, 
authorized  it  to  unite  with  the  older  bank  under  the  denom- 
ination of  the  National  Bank  of  Sardinia,  with  head  offices  at 
both  Genoa  and  Turin.  The  duration  of  the  new  establish- 
ment was  fixed  at  thirty  years,  beginning  on  January  i, 
1850,  and  its  capital  at  8,000,000  lires,  which  was  afterwards 
increased  to  32,000,000  lires  ($6,200,000). 

The  government  in  1848  resolved  upon  a  loan  of  20,000,000 
lires,  which  the  Bank  of  Genoa  was  required  to  furnish  at 
two  per  cent. ,  upon  the  pledge  of  the  goods  of  the  Order  of 
Saints  Maurice  and  Lazarus.  Forced  legal  tender  character 
was  given  to  the  bank-notes  and  an  increase  in  issues  per- 
mitted of  20,000,000  lires.  The  smallest  notes  were  reduced 
from  250  lires  ($50)  to  100  lires  ($20)  with  the  condition  that 
the  notes  of  100  lires  should  not  be  issued  to  the  amount  of 
more  than  one-fifth  of  the  total  circulation.  The  loan  was 
reimbursed  to  the  bank  and  specie  payments  were  resumed 
at  the  end  of  I849.1  The  bank  from  that  time  followed  the 
fortunes  of  the  Royal  House  of  Sardinia,  and  extended  its 
branches  and  operations  with  the  success  of  the  Sardinian 
arms  and  the  consolidation  of  the  Italian  States.  It  was 
necessary  in  1856  to  authorize  the  bank  to  exceed  the 
maximum  note  circulation  allowed  by  its  statutes,  which  was 
three  times  the  cash  reserve.  The  bills  of  the  bank  were 
again  made  legal  tender,  with  suspension  of  cash  payments 
on  April  27,  1859,  on  the  occasion  of  the  war  with  Austria, 
and  the  bank  was  authorized  to  issue  6,000,000  lires  in  notes 
of  twenty  lires  ($4)  and  to  open  a  credit  for  the  government 
to  the  amount  of  30,000,000  lires  at  two  per  cent.  The  bank 


Courcelle-Seneuil,  354. 


ANCIENT  AND  MODERN  BANKING  IN  ITALY.      2 7 

was  prudently  conducted,  the  government  did  not  draw  its 
full  credit,  and  the  notes  fell  but  little  below  par.  Their 
circulation  was  extended  on  June  n,  1859,  to  the  entire 
territory  occupied  by  the  Sardinian  troops. 

The  bank  was  reorganized  at  this  time  as  the  National 
Bank  of  the  Kingdom  of  Italy,  in  pursuance  of  the  plans  of 
King  Victor  Emmanuel  for  the  unification  of  Italy.  Its 
capital  was  increased  to  40,000,000  lires  ($8,000,000)  and 
three  head  offices  of  equal  rank  were  established  at  Turin, 
Genoa,  and  Milan,  the  latter  being  a  new  office  within  the 
territory  added  to  the  new  Kingdom  of  Italy.  The  bank 
resumed  specie  payments  and  opened  a  credit  of  18,000,000 
lires  in  favor  of  the  government.  Branches  were  established 
in  1860  at  Bergama,  Brescia,  Como,  Modena,  and  afterwards 
at  Ancona  and  Perusia.  The  bank  absorbed  the  leading 
banks  of  Bologna  and  Parma  and  established  branches  at 
Ferrara,  at  Forli,  and  at  Ravenna.  The  annexation  of 
Naples  to  the  Kingdom  of  Italy  did  not  result  in  the  de- 
struction of  the  Banks  of  Naples  and  Sicily,  but  the  National 
Bank  was  authorized  to  establish  a  principal  branch  at 
Naples  and  branches  at  Catana,  Messina,  Reggio,  and  other 
places  in  Southern  Italy.  Branches  were  also  authorized  at 
this  time  at  Pavia,  Cremona,  and  Piacentia. 

The  character  of  the  National  Bank  of  the  Kingdom  of 
Italy  was  not  essentially  changed  until  the  Act  of  August 
10,  1893,  kut  its  relations  to  the  government  constantly  grew 
closer  and  it  was  compelled  to  accept  forced  legal  tender  for 
its  notes  in  order  to  comply  with  demands  for  advances  to 
the  State.  Suspension  of  specie  payments  was  decreed  at 
the  outbreak  of  the  war  in  1866,  although  the  capital  of  the 
Bank  had  been  increased  by  the  decree  of  June  29,  1865,  to 
100,000,000  lires  ($20,000,000).  The  provision  for  the  .sus- 
pension of  specie  payments,  with  legal  tender  quality  for  the 
bank-notes,  applied  only  to  the  National  Bank,  but  the  latter 
was  required  to  furnish  circulating  notes  without  charge  to 
other  banks  of  circulation.  The  depreciation  of  the  bank-notes 
drove  the  subsidiary  coins  out  of  circulation,  and  many  small 
banks  of  deposit,  commercial  houses,  and  even  retailers,  issued 


28  HISTORY  OF  MODERN  BANKS   OF  ISSUE. 

certificates  of  one  lire  and  50  centimes  to  take  their  place. 
The  government  in  1868  sought  to  drive  these  notes  out  of 
circulation  by  authorizing  the  issue  of  notes  for  one  lire  by 
the  regular  banks  of  circulation,  which  were  made  legal 
tender  for  a  limited  sum  throughout  the  Kingdom.  The 
bank  made  handsome  profits,  as  usual  when  specie  payments 
are  suspended,  made  large  advances  to  the  government  and 
again  increased  its  capital  to  200,000,000  lires  under  author- 
ity of  a  law  of  April  9,  1872.' 

The  policy  of  the  Italian  government  to  introduce  unity 
into  every  branch  of  Italian  affairs  was  pursued  cautiously 
in  the  case  of  the  bank-note  circulation  and  without  the 
hasty  abrogation  of  the  rights  of  the  banks.  No  new  bank 
could  be  constituted  without  the  authority  of  a  special  law, 
but  five  banks  of  circulation  conducted  business  without 
interference  by  the  side  of  the  National  Bank  of  Italy. 
The  Roman  Bank,  founded  in  1851  with  a  privilege  secured 
until  December  31,  1889,  had  a  capital  of  15,000,000  lires- 
and  while  Rome  was  independent  of  the  Kingdom  of  Italy  was 
under  the  protection  in  a  measure  of  the  Papal  power.  The 
National  Bank  of  Tuscany  was  established  in  July,  1857, 
with  a  capital  of  30,000,000  lires  and  the  Tuscan  Bank  of 
Credit  was  established  for  thirty  years  in  March,  1860,  with 
a  capital  of  10,000,000  lires,  of  which  only  half  was  paid  in. 
Both  these  banks  were  located  at  Florence.  The  Bank  of 
Naples  was  founded  as  early  as  1794  and  the  capital  was 
contributed  in  part  by  the  State.  It  had  a  head  office  at 
Rome  and  about  a  dozen  branches.  The  Bank  of  Sicily  was 
also  an  old  establishment,  with  its  headquarters  at  Palermo, 
four  principal  offices  in  other  parts  of  Sicily  and  branches  at 
Rome  and  elsewhere  in  Italy.  The  capital  of  the  Bank  of 
Naples  was  originally  32,500,000  lires  and  that  of  the  Bank 
of  Sicily  was  8,000,000  lires.  The  authorized  circulation  of 
these  banks  under  the  law  of  1874  was  450,000,000  lires  for 
the  National  Bank  of  Italy  ;  45,000,000  lires  for  the  Roman 
Bank  ;  63,000,000  lires  for  the  National  Bank  of  Tuscany  ; 


Juglar,  Article  "  Banques,"  in  Dictionnaire  des  Finances,  I.,  344. 


ANCIENT  AND  MODERN  BANKING  IN  ITALY.      29 

15,000,000  lires  for  the  Tuscan  Bank  of  Credit ;  146,250,000 
lires  for  the  Bank  of  Naples,  and  36,000,000  for  the  Bank  of 
Sicily,  making  a  total  of  755,250,000  lires  ($i5O,ooo,ooo).1 

The  necessity  of  maintaining  public  credit,  and  some  com- 
plaints by  the  other  banks  that  they  suffered  by  the  special 
favors  granted  to  the  National  Bank,  led  to  legislation  in 
1874  which  established  the  Consorzio.  This  arrangement 
formed  the  banks  into  a  syndicate  for  the  withdrawal  of  the 
notes  issued  directly  on  behalf  of  the  government  and  the 
substitution  of  a  like  sum  (840,000,000  lires)  in  bank  bills 
of  the  National  Bank,  which  were  made  legal  tender  through- 
out the  Kingdom.  The  notes  issued  by  the  provincial  banks 
on  their  own  account  were  to  be  legal  tender  only  within  the 
province  in  which  the  bank  was  established.  The  govern- 
ment voted  itself  the  authority  to  increase  its  loans  from  the 
associated  banks  to  1,000,000,000  lires  ($200,000,000)  and  to 
demand  a  certain  proportion  of  the  amount  in  gold.  The 
-government  pledged  itself  to  deposit  five  per  cent,  securities 
as  the  guarantee  of  the  loan  and  to  pay  a  low  rate  of  inter- 
est. The  advances  actually  made  to  the  government  under 
this  arrangement  reached  940,000,000  lires,  of  which  600,- 
000,000  was  reimbursed  from  the  product  of  a  specie  loan 
authorized  by  the  law  of  April  7,  1881,  and  the  remainder 
was  transformed  into  government  bills.  The  Consorzio 
came  to  an  end  with  the  abolition  of  forced  legal  tender  in 
1884.  The  circulation  of  the  banks  was  slightly  increased 
by  the  law  of  June  30,  1891,  which  admitted  a  maximum 
limit  equal  to  the  mean  circulation  of  1890. 

The  suspension  of  specie  payments,  the  failure  of  the 
Roman  Bank,  and  the  almost  complete  collapse  of  the  bank- 
ing system  of  Italy  came  about  in  the  latter  part  of  1892  and 
the  beginning  of  1893  as  the  result  of  wilful  violations  of 
law  by  the  banks  and  the  guilty  connivance  of  public  offi- 
cials. The  Roman  Bank  was  accused  of  exceeding  its  circu- 
lation at  almost  the  same  moment  that  the  director  of  the 
Roman  branch  of  the  Bank  of  Naples,  Signer  Cucciniello, 

1  Alfred  Neymarck,  Article  "  Banque,"  in  Dictionnaire 
Politique,  L,  141-42. 


3O  HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

fled  with,  his  secretary,  leaving  obligations  of  2,000,000  lires 
($400,000)  and  compelling  the  branch  to  close.  It  was  found 
that  the  excess  of  note  issues  had  been  distributed  among 
the  politicians  by  the  thousands  and  hundreds  of  thousands. 
A  Roman  deputy  had  received  4,000,000  lires ;  a  former 
minister,  2,000,000  lires  ;  a  well-known  financier,  1,500,000  ; 
a  newly  elected  deputy,  1,000,000  ;  a  former  editor,  150,000  ; 
and  others,  various  sums  from  1,000  to  500,000  lires.1  Some 
of  these  sums  were  put  in  the  form  of  loans  and  advances, 
but  the  security  was  nominal,  many  of  the  loans  were  long 
over-due,  and  Signor  Tanglongo  of  the  bank  management 
declared  that  he  had  been  compelled  to  retain  these  people 
by  the  orders  of  several  ministers  and  of  a  president  of  the 
council. 

An  official  investigation  was  ordered  and  the  report  by 
Senator  Finali  showed  that  three  of  the  banks  had  exceeded 
the  legal  limit  of  their  circulation  and  that  all  had  tied  up 
their  assets  to  an  alarming  extent  in  securities  which  could 
not  be  readily  negotiated.  The  excess  of  circulation  in  the 
case  of  the  Roman  Bank  was  64,543,230  lires  ;  the  Bank  of 
Sicily,  14,917,203  lires;  and  the  Bank  of  Naples,  2,041,501 
lires.  It  was  found  that  the  National  Bank  also  had  issued 
53, 700,000  lires  illegally  by  order  of  the  administration. 
The  funds  not  readily  negotiable  at  sight  were  reported  as 
628,620,686  lires,  or  nearly  twice  the  capital  and  reserves  of 
the  banks,  the  Tuscan  Bank  of  Credit  alone  being  in  a  sound 
condition.2  The  loans  upon  mortgages  and  other  securities 
slow  to  realize  were  199,756,000  lires,  and  what  were  called 
the  "  Direct  Employments"  of  the  funds,  in  Treasury  bonds 
and  other  paper  below  par  or  of  doubtful  value,  were  172,- 
343,000  lires.  The  deputies  who  had  paper  over-due  were 
found  to  number  sixteen,  and  the  amount  of  the  paper  was 
5,922,410  lires,  some  of  it  going  back  to  1878.  There  were 
nine  more  deputies  who  had  obtained  renewals  to  the  amount 
of  641,670  lires.  Among  the  latter  was  Premier  Crispi,  with 
loans  of  244,000  lires  which  had  been  renewed  since  1887. 

1  Revue  des  Banques,  March,  1893,  XII.,  335. 

2  Revue  des  Banques,  May,  1893,  XII.,  378. 


ANCIENT  AND  MODERN  BANKING  IN  ITALY.       31 


It  was  stated  that  a  report  of  August  30,  1889,  nad  shown  a 
clandestine  circulation  of  9,000,000  lires  by  the  Roman  Bank, 
and  that  it  was  known  to  Signor  Crispi,  then  President  of 
the  Council  of  Ministers,  as  well  as  to  Signor  Giolitti.1 

These  discoveries  were  a  death-blow  to  the  Italian  bank- 
ing system  as  it  then  existed.  The  Roman  Bank  was  com- 
pelled to  liquidate,  and  its  affairs  were  taken  in  charge  by 
the  National  Bank.  The  privilege  of  the  banks  expired  in 
1889  and  1890,  but  had  been  renewed  for  brief  periods  until 
the  close  of  1892.  A  law  was  then  pending,  proposed  by 
Signor  Grimaldi,  which  provided  for  a  renewal  for  six  years, 
and  that  every  bank  should  accept  the  notes  of  the  others. 
But  this  project  went  by  the  board  when  the  rottenness  of 
the  existing  banking  system  was  discovered,  and  the  gov- 
ernment seized  the  opportunity  to  push  a  step  further  the 
policy  of  unity  and  consolidation.  The  National  Bank  of 
the  Kingdom  was  badly  compromised,  and  the  redemption 
of  its  notes  in  specie  was  indefinitely  suspended,  but  it  was 
made  the  basis  of  the  new  institution  founded  by  the  law  of 
August  10,  1893. 

The  new  law  provided  for  the  fusion  of  the  National  Bank 
of  the  Kingdom  of  Italy  with  the  National  Bank  of  Tus- 
cany and  the  Tuscan  Bank  of  Credit.  The  name  of  the 
new  institution  is  simply  the  Bank  of  Italy,  and  it  is  required 
to  establish  offices  or  branches  wherever  they  have  been 
established  by  the  National  Bank  of  Tuscany.  The  capital 
of  the  new  bank  was  fixed  at  300,000,000  lires  ($60,000,000) 
and  its  privileges  were  confirmed  for  twenty  years.  The 
Roman  Bank  was  already  in  process  of  liquidation  when  this 
act  was  passed,  so  that  the  only  remaining  banks  of  issue 
are  those  of  Naples  and  Sicily.  The  maximum  limit  of  cir- 
culation during  the  continuance  of  the  forced  legal  tender 
policy,  was  fixed  at  800,000,000  lires  for  the  Bank  of  Italy, 
242,000,000  lires  for  the  Bank  of  Naples,  and  55,  000,000  lires 
for  the  Bank  of  Sicily.  This  circulation  is  to  be  reduced 
every  two  years  after  1897,  and  until  in  1907  it  shall  stand 


Le  Marche  Financier  en  1893-94,  131. 


32  HISTORY   OF  MODERN  BANKS  OF  ISSUE. 

at  630,000,000  lires  for  the  Bank  of  Italy,  190,000,000  for  the 
Bank  of  Naples,  and  44,000,000  lires  for  the  Bank  of  Sicily, 
making  a  total  of  864,000,000  lires.  If  either  bank  at  the 
end  of  fourteen  years,  from  the  date  of  the  law,  lacks  a 
reserve  corresponding  to  one-third  of  its  circulation,  the 
circulation  must  be  reduced  within  three  months,  and  the 
amount  of  the  reduction  transferred  to  the  banks  which  pos- 
sess or  pay  in  the  necessary  reserve.1  The  banks  are  author- 
ized to  increase  their  circulation  beyond  the  legal  limits 
when  their  notes  are  entirely  covered  by  legal  coin  or  by  gold 
bullion,  and  notes  may  be  issued  beyond  the  limit  for  the 
purpose  of  advances  to  the  government. 

The  reserves  of  the  banks,  when  on  a  specie  basis,  are  fixed 
at  forty  per  cent,  of  the  circulation,  including  thirty-three 
per  cent,  in  coin  or  bullion  and  the  remainder  in  foreign 
bills  of  exchange  approved  by  the  Minister  of  the  Treasury. 
The  metallic  reserve  is  required  to  consist  of  gold  in  the 
proportion  of  at  least  three-quarters.  The  law  provides  that 
bills  now  in  circulation  shall  cease  to  be  a  legal  tender  after 
December  31,  1897,  and  shall  no  longer  be  redeemable  after 
December  31,  1902.  A  permanent  supervision  over  banks 
of  issue  is  established  through  a  board  consisting  of  the  Min- 
ister of  Agriculture,  Industry  and  Commerce,  and  the  Minis- 
ter of  the  Treasury.  A  special  inspection  is  to  be  made 
under  the  authority  of  these  ministers  every  two  years,  and 
the  results  reported  to  Parliament  within  three  months.  The 
nomination  of  the  director  general  of  the  Bank  of  Italy 
must  be  approved  by  the  government.  One  of  the  provisions 
of  the  law  provided  that  if  the  deposits  exceeded  a  certain 
figure,  the  bank  must  reduce  its  circulation  by  three-quarters 
of  the  deposits  bearing  interest  in  excess  of  the  limit ;  but 
this  provision  was  suspended  by  decree  of  January  23,  1894. 2 

The  new  banking  law  did  not  rescue  Italy  from  the  regime 
of  depreciated  currency  and  was  probably  not  expected  to 
do  so.  The  government  was  reduced  to  subterfuges  to  in- 

1  Section  2,  Law  of  August  10,  1893,  Bulletin  de  Statistique,  XXXIV., 

254- 

*  Bulletin  de  Statistique,  February,  1894,  XXXV.,  207. 


ANCIENT  AND  MODERN  BANKING  IN  ITALY.      33 

crease  the  volume  of  paper  money  and  provide  itself  with 
funds  to  meet  pressing  obligations.  The  decree  of  January 
23,  1894,  permitted  a  supplementary  issue  of  bank-notes  to 
the  amount  of  90,000,000  lires  for  the  Bank  of  Italy,  28,000,- 
ooo  for  the  Bank  of  Naples,  and  7,000,000  for  the  Bank  of 
Sicily.  These  new  issues  were  not  directly  authorized,  but 
the  penal  tax  imposed  by  the  banking  law  was  reduced  to 
two-thirds  of  the  rate  of  discount  up  to  the  limit  of  the  pro- 
posed new  issue.  A  decree  a  month  later,  February  21, 
1894,  purported  to  put  a  limit  of  600,000,000  lires  on  the 
circulation  of  State  notes,  and  Article  5  of  the  same  decree 
provided  that  the  banks  might  redeem  their  notes  on  pre- 
sentation at  the  market  rate  of  depreciation.  This  favor 
was  only  to  be  accorded,  however,  to  the  banks  which  com- 
plied with  the  requirement  of  Article  2,  that  they  transfer  to 
the  credit  of  the  government  200,000,000  lires  in  gold  and 
accept  a  new  issue  of  government  notes  as  a  substitute.1  The 
new  notes,  of  which  145,000,000  lires  were  apportioned  to 
the  Bank  of  Italy,  45,000,000  lires  to  the  Bank  of  Naples, 
and  10,000,000  lires  to  the  Bank  of  Sicily,  were  thus  nomi- 
nally covered  by  gold,  but  no  provision  was  made  for  reduc- 
ing the  volume  of  outstanding  bank-notes  or  for  replacing 
the  gold  withdrawn  from  the  bank  reserves. 

The  result  of  measures  like  these  was  to  drag  Italy  deeper 
and  deeper  into  the  mire,  make  the  rates  of  foreign  exchange 
more  and  more  unfavorable  and  the  receipts  of  the  Treasury 
of  constantly  diminishing  value  in  gold.  The  additional 
issue  of  bank-notes  authorized  by  the  decree  of  January  23, 
1894,  was  avowedly  for  the  purpose  of  meeting  the  demands 
of  the  depositors  in  the  savings  banks,  who  upon  demanding 
the  restoration  of  the  deposits  they  had  made  in  good  money 
were  reduced  to  the  choice  of  leaving  their  deposits  in  the 
hands  of  a  discredited  government  or  accepting  the  paper 
promises  of  the  suspended  banks.  One  of  the  expedients 
adopted  to  protect  the  Treasury  was  the  levy  of  a  tax  of 
twenty  per  cent,  on  the  interest  of  the  public  debt,  which  was 


1  Bulletin  de  Statistique,  March,  1894,  XXXV.,  335. 

3 


34  HISTORY  OF  MODERN  BANKS   OF  ISSUE. 

only  an  indirect  way  of  scaling  the  interest  on  the  consoli- 
dated five  per  cents,  to  four  per  cent.1  The  depreciation  of 
the  paper  money  has  become  so  great  as  to  drive  all  subsi- 
diary coins  out  of  the  country  and  make  it  difficult  to  get 
change  for  a  note  of  a  few  lires.  Twenty  million  lires  was 
issued  during  1894  in  nickel  pieces  of  twenty  centimes,  and 
the  government  congratulated  themselves  on  a  profit  of 
17,500,000  lires  by  means  of  the  seignorage. 

The  flight  of  subsidiary  money  from  Italy  carried  it  to 
France,  Switzerland,  and,  to  some  extent,  to  Belgium,  where 
it  passed  in  ordinary  transactions  upon  the  same  terms  as. 
the  money  of  those  countries.  So  much  Italian  silver  drifted 
into  Southern  France  that  the  French  government  made  an 
investigation  of  the  amount  received  on  a  given  day  at  some 
of  the  leading  banks  and  found  that  Italian  pieces  consti- 
tuted 28.78  per  cent,  of  the  entire  subsidiary  circulation. 
Belgian,  Swiss,  and  Greek  pieces  constituted  12.30  per  cent., 
so  that  the  proportion  of  French  coins  was  only  58.92  per 
cent.  Italian  subsidiary  coin  constituted  more  than  seventy 
per  cent,  of  the  circulation  in  Savoie  and  the  Maritime  Alps 
and  from  45  to  60  per  cent,  in  eight  other  departments  be- 
tween the  Rhone  and  the  Alps.2  A  conference  of  the  states 
of  the  L,atin  Union,  held  at  Paris,  reached  an  agreement  on 
November  15,  1893,  by  which  the  Italian  subsidiary  coins 
were  to  cease  in  four  months  to  be  received  by  public  deposi- 
taries in  France.  Those  in  the  Bank  of  France  were,  upon 
presentation  to  the  Italian  government,  to  be  redeemed  half 
in  gold  and  half  by  bills  of  exchange.  The  amount  thus- 
presented  up  to  the  close  of  1894  was  57,222,279  lires.3  The 
policy  adopted  by  the  Italian  government  for  preventing  the 
continued  exportation  of  the  silver,  of  locking  it  up  in  the 
Treasury  and  issuing  small  notes  against  it,  was  sanctioned 
by  the  conference  upon  the  condition  that  the  subsidiary 


1  Le  Marche  Financier  en  1893-94,  I3^- 

2  Le  Marche  Financier  en  1893-94,  348-68. 

3  Assemblee  Generate  des  Actionnaires  de  la  Banque  de  France  du 
31  Janvier,  1895,  p.  9. 


ANCIENT  AND  MODERN  BANKING  IN  ITALY.      35 

silver  of  Italy  should  never  exceed  the  limit  of  six  lires  per 
head  originally  fixed  by  the  Latin  Union. 

The  report  of  the  Minister  of  the  Treasury,  Sidney  Son- 
nino,  to  the  Chamber  of  Deputies,  on  December  10,  1894, 
offered  only  a  distant  hope  of  the  restoration  of  sound  finan- 
cial conditions  in  Italy.  The  result  of  the  special  examina- 
tion of  the  banks  in  February  was,  in  his  own  words,  "  not 
very  favorable. ' '  The  Minister  proposed  a  somewhat  elabo- 
rate scheme  of  law  to  put  in  effect  a  convention  between  the 
bank  and  the  Treasury.  The  period  of  liquidating  the  un- 
available assets  of  all  the  banks  was  extended  to  fifteen 
years.  The  Bank  of  Italy  assumed  the  liquidation  of  the 
affairs  of  the  Roman  Bank  and  received  in  return  the  cus- 
tody of  the  public  funds  in  the  provinces,  paying  interest  at 
one  and  a  half  per  cent,  on  sums  above  40,000,000  lires. 
The  bank  was  required  to  deposit  with  the  Treasury  a  guar- 
antee fund  of  50,000,000  lires  in  national  securities  and  to 
increase  the  amount  within  six  years  to  90,000,000  lires  ;  to 
increase  the  limit  of  advances  to  the  Treasury  from  90,000,- 
ooo  to  100,000,000  lires  ;  to  call  upon  shareholders  for  an 
assessment  of  100  lires  per  share,  amounting  to  30,000,000 
lires,  and  to  reduce  the  capital  by  an  equal  amount.  The 
bank  was  required  to  set  aside  4,000,000  lires  in  1894,  5,000,- 
ooo  lires  in  1895,  and  thereafter  6,000,000  lires  annually,  to 
be  invested  in  national  securities  to  form  a  reserve  fund  to 
cover  the  losses  by  the  Roman  Bank,  and  any  profit  which 
might  remain  was  allowed  to  be  divided  among  the  share- 
holders, to  a  maximum  limit  of  40  lires  per  share.1  This 
remarkable  method  of  liquidation, — by  converting  locked-up 
assets  into  a  new  form  of  such  assets,  instead  of  paying  off 
liabilities, — was  approved  by  the  shareholders  of  the  Bank 
of  Italy  on  February  25,  1895,  for  they  practically  had  no 
option  but  to  accept  the  proposals  of  the  government.2 

The  following  table  shows  the  condition  of  the  three 
Italian  banks  of  circulation  on  September  30,  1895  : 

1  Bulletin  de  Statistique,  December,  1894,  XXXVI.,  587-89. 
5  Raffalovich,  Le  Marche  Financier  en  1894-95,    177. 


HISTORY  OF  MODERN  BANKS  OF  ISSUE. 


BANK. 

METALLIC 
RESERVE. 

CIRCULATION. 

CURRENT 
ACCOUNTS. 

DISCOUNTS. 

Bank  of  Italy  

349-7 
116.1 
36.7      • 

(In  million 
766.9 

238.7 
49.2 

s  of  lires.) 

229.8 

78.6 
36.4 

208.6 

53-8 

22.0 

Bank  of  Naples.  .. 
Bank  of  Sicily  

One  of  the  beneficent  features  of  the  banking  system  of 
Southern  Italy  is  the  support  which  it  lends  to  the  popular 
banks,  which  afford  a  means  of  raising  money  to  small  culti- 
vators, shopkeepers,  and  even  to  laborers.  The  government 
was  empowered,  by  Article  38  of  the  law  of  January  23, 
1887,  relating  to  people's  banks,  to  authorize  loans  for  agri- 
cultural purposes  by  banks  of  issue.  The  necessity  of  using 
this  power  sparingly  was  appreciated,  but  the  management 
of  the  Bank  of  Naples  voted  on  May  4,  1889,  to  set  aside 
8,000,000  lires  ($1,600,000)  for  this  purpose  and  their  action 
was  approved  by  the  government.1  But  perhaps  the  more 
important  service  rendered  to  popular  credit  is  in  the  redis- 
counting  of  the  paper  of  the  people's  banks.  The  large 
bank  thus  escapes  the  difficult  work  of  discriminating  among 
individuals  of  small  means  by  directly  discounting  their  paper 
and  obtains  at  the  same  time  the  guarantee  of  the  local  bank 
as  well  as  of  the  borrower  and  his  security.  The  Bank  of 
Naples  voluntarily  discounts  for  those  who  appear  most 
worthy  of  it  at  one  per  cent,  below  the  ordinary  commercial 
rate.  Thirty-four  people's  banks  in  1883  had  obtained  this 
reduced  rate  on  sums  of  4,249,348  lires  ($820,000)  and  thirty- 
six  banks  had  obtained  discount  at  the  regular  rates  on 
9,971,726  lires  ($1,924,000). 

The  Bank  of  Sicily  has  endeavored  even  more  generously 
to  promote  the  system  of  the  people's  banks.  Signer  Notar- 
bartolo,  the  director  general,  proposed  in  1882  the  establish- 
ment of  independent  agencies,  sharing  in  the  profits  of  the 
Bank  and  supported  by  its  credit ;  but  the  Minister  of  Ag- 
riculture and  Commerce  decided  that  a  bank  of  issue  could 

1  Durand,  481-82. 


ANCIENT  AND  MODERN  BANKING  IN  ITALY.      37 

not  receive  additions  in  this  manner  to  its  capital  without 
authority  of  law.  Signer  Notarbartolo  then  formulated  a 
plan  for  making  the  people's  banks  correspondents  of  the 
Bank  of  Sicily  with  the  benefit  of  discount  one  per  cent, 
below  the  ordinary  rate  and  this  was  put  into  actual  opera- 
tion.1 The  result  has  been  the  creation  of  popular  banks  all 
over  Sicily  and  Southern  Italy.  The  popular  banks  of 
Northern  Italy  had  an  older  foundation  and  were  either 
capable  of  standing  alone  or  were  sustained  by  other  institu- 
tions which  were  not  banks  of  issue. 

1  Durand,  509. 


CHAPTER   III. 

BANKING    IN     FRANCE. 

The  Events  Out  of  Which  the  Bank  of  France  has  Grown — The  Mis- 
sissippi Bubble  of  John  Law  and  its  Collapse — The  Banks  of 
Paris  before  the  Revolution — Failure  of  the  Assignats  and  the 
Revival  of  Commercial  Banking — Birth  of  the  Bank  of  France 
and  its  Absorption  of  the  Departmental  Banks — The  Latin  Union 
and  the  Embarrassments  Caused  by  the  Fall  in  the  Price  of  Silver 
—The  Proposed  Renewal  of  the  Bank  Charter. 

THE  Bank  of  France  is  the  greatest  and  in  many  respects 
the  strongest  of  the  banks  of  the  world,  and  its  devel- 
opment exhibits  many  of  the  most  interesting  phases 
of  banking  history  outside  of  Great  Britain.  French  bank- 
ing is  done  pre-eminently  through  the  issue. of  circulating 
notes,  and  the  aggregate  monetary  circulation  of  France  is 
greater  than  that  of  any  other  country.  The  origins  of 
banking  in  France  go  back  to  the  "  Mississippi  plan  "  of 
John  L,aw,  but  its  history  during  the  present  century  has 
been  essentially  one  of  prudence  and  moderation,  if  not  al- 
ways of  the  most  enlightened  financial  policy.  Monopoly 
of  the  power  of  note  issue  now  belongs  to  the  Bank  of  France, 
but  is  far  from  having  been  its  immemorial  right.  The 
regime  of  the  independent  departmental  banks,  which  were 
absorbed  by  the  central  institution  in  1848,  is  still  recalled 
with  pride  by  many  French  economists,  and  the  approaching 
expiration  of  the  charter  of  the  Bank  of  France  may  tempt 
them  to  a  renewal  of  the  contest  then  so  warmly  waged 
between  "monopoly"  and  ''liberty." 

The  first  French  bank  of  issue  was  created  by  John  Law 
under  the  regency  of  the  Duke  of  Orleans,  at  the  beginning 

38 


BANKING  IN  FRANCE.  39 

of  the  eighteenth  century.  Scotland,  which  gave  to  the 
world  the  founder  of  the  classical  school  of  political  economy 
in  Adam  Smith,  was  also  the  birthplace  of  Law,  the  author 
of  ' '  The  System ' '  which  introduced  the  use  of  negotiable 
securities  on  a  broad  scale  into  France.  The  name  of  Law 
has  been  synonymous  with  the  most  reckless  speculation  and 
brazen  fraud,  but  the  bank  which  he  founded  was  at  the  out- 
set conducted  upon  conservative  principles,  and  even  the  sys- 
tem of  the  "  Company  of  the  West"  (Compagnie  cT  Occident], 
more  generally  known  as  the  Mississippi  Company,  was 
conceived  upon  broad  and  not  impossible  lines  before  the 
stock  was  made  the  plaything  of  speculation.  Law  desired 
to  establish  a  royal  bank  of  state,  but  the  government  was 
only  willing  to  grant  a  charter  for  an  institution  managed  by 
private  citizens.  The  bank  thus  founded  by  letters  patent 
May  2,  1716,  was  authorized  to  issue  bills  in  crowns  of 
specie  under  the  name  of  "bank  crowns,"  redeemable  in 
money  of  the  weight  and  denomination  of  the  day  of  issue.1 
This  was  intended  to  guard  the  bank-notes  against  the  possi- 
ble fluctuations  and  changes  in  the  metallic  standard  and 
give  them  some  such  preference  as  that  given  to  the  "  bank 
money"  of  the  Bank  of  Amsterdam.  The  feature  which 
rapidly  attracted  subscriptions  to  the  stock  was  Law's  offer 
to  accept  payment  at  the  rate  of  twenty-five  per  cent,  in 
specie  and  seventy-five  per  cent,  in  bills  of  state,  which 
were  at  a  discount  of  about  seventy-five  per  cent. 

Discount  was  granted  by  the  bank  at  the  rate  of  five  per 
cent.,  and  officers  of  the  finances  received  orders  in  October, 
1716,  to  make  their  remittances  upon  Paris  in  bank-bills, 
and  to  redeem  these  bills  at  sight  when  presented  to  them. 
Another  official  decree  of  April  10,  1717,  authorized  the 
receipt  of  the  bills  as  money  for  the  payment  of  public 
revenues.  If  the  bank  had  continued  upon  the  sound 
basis  of  a  bank  discounting  commercial  paper  and  acting 
as  the  fiscal  agent  of  the  Treasury,  France  would  have 
been  under  a  great  debt  of  gratitude  to  Law  for  introducing 
into  her  commercial  relations  the  methods  of  the  modern 

1  Courtois,  10. 


4O  HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

business  world.  Prof.  H.  Dunning  MacLeod,  as  keen  a 
thinker  and  acute  a  critic  as  has  written  upon  monetary  sub- 
jects, says  : 

Nothing  could  be  more  extraordinary  than  the  restoration  of  pros- 
perity caused  by  the  foundation  of  Law's  Bank  in  1716.  It  is  proba- 
bly one  of  the  most  marvellous  transitions  from  the  depths  of 
misery  to  the  height  of  prosperity  in  so  short  a  space  of  time  in  the 
annals  of  any  nation.  And,  if  Law  had  confined  himself  to  that,  he 
would  have  been  one  of  the  greatest  benefactors  any  nation  ever  had.1 

But  I^aw  had  much  more  comprehensive  schemes  than  the 
creation  of  a  bank  of  discount.  He  determined  to  unite 
into  a  single  great  monopoly  the  various  commercial  compa- 
nies which  had  been  incorporated  since  the  discovery  of 
America,  for  the  purpose  of  trade  and  the  extension  of 
French  influence.  Courtois  enumerates  no  less  than  thirty 
of  these  corporations  which  had  been  authorized  during  the 
previous  century,  but  many  of  them  had  languished,  run  in 
debt,  and  been  consolidated  with  others.  L,aw  proposed  a 
stock  company  with  a  capital  of  100,000,000  livres,  divided 
into  200,000  shares  of  500  livres  each,  payable  in  bills  of 
state  which  were  still  at  a  discount  of  about  sixty-six  per 
cent.3  The  State  was  to  pay  the  company  an  annual  interest 
of  four  per  cent,  on  the  principal  of  the  bills  withdrawn  by 
this  means  from  circulation. 

The  Compagnie  d' Occident  was  incorporated  by  a  decree 
of  August  28,  1717,  registered  by  the  Parliament  on  Sep- 
tember 6th,  for  a  duration  of  twenty-five  years.  Four  compa- 
nies were  consolidated  at  the  outset,  which  controlled  the 
commerce  of  Louisiana,  Canada,  and  the  Western  Coast  of 
Africa,  and  the  new  company  was  to  enjoy  all  the  rights  of 
sovereignty  over  the  lands  which  it  possessed.  The  shares, 
which  were  made  out  in  certificates  of  one  share  or  ten, 


1  Theory  and  Practice  of  Banking,  II.,  254. 

a  The  variations  in  the  coinage  at  this  time  were  such  as  to  make  a 
statement  of  the  value  of  coins  an  almost  impossible  task,  but  the 
livre  may  be  taken  in  a  general  way  as  about  the  equivalent  of  the 
later  franc — 19.3  cents  in  United  States  gold  coin.  For  a  full  account 
of  the  changes  in  the  coinage  system,  see  Shaw,  396-423. 


BANKING  IN  FRANCE.  41 

were  transferable  by  bearer,  a  system  for  the  first  time  intro- 
duced into  France,  so  far  as  known  ;  for  even  the  shares  of 
bank  were  made  out  to  the  owners.  Law  proceeded  to 
make  negotiations  with  the  government  through  his  friend, 
the  Regent,  for  farming  the  taxes,  for  coining  money,  for 
managing  the  tobacco  monopoly,  which  had  been  under  the 
control  of  the  State,  and  for  assuming  the  entire  public  debt. 
He  introduced  a  number  of  reforms  into  the  collection  of  the 
taxes  by  discontinuing  the  collection  of  those  which  were 
disproportionately  costly  and  vexatious  in  proportion  to  the 
amount  obtained,  and  he  proposed  more  sweeping  changes 
which  would  have  abolished  needless  offices,  consolidated 
various  imposts  into  one,  and  removed  some  of  the  fetters 
from  French  commerce. 

The  attribution  of  all  these  public  functions  to  a  single 
company,  as  well  as  the  management  of  the  commerce  of 
two  continents,  would  in  themselves  probably,  as  Law's 
great  opponent,  Paris-Duverney,  pointed  out,  have  caused 
the  organization  to  break  down  of  its  own  weight,  and  have 
attracted  the  jealousy  of  the  government.  But  Law,  and 
those  who  were  carried  away  with  him  by  the  grandeur  of 
the  new  scheme,  did  not  wait  for  the  slow  operation  of  com- 
mercial causes  to  sow  the  seeds  of  destruction  of  their  enter- 
prise. He  succeeded  in  having  the  bank  transformed  into 
a  public  institution  (Banque  Roy  ale}  by  a  decree  of  December 
27,  1718,  and  had  the  stockholders  reimbursed  in  specie 
for  their  subscriptions.  Redemption  of  the  notes  in  bank 
crowns  was  abandoned  by  the  decree  which  made  the  bank  a 
public  one,  and  redemption  was  required  only  in  the  official 
money  of  the  country.  This  move  created  a  degree  of  dis- 
trust which  led  to  a  new  decree  of  April  22,  1719,  that  bills 
payable  in  the  existing  standard  should  not  be  subject  to  the 
diminutions  which  might  affect  specie.  The  tendency  of  such 
a  decree  was  to  put  the  bank-bills  at  a  premium  over  cur- 
rent coins,  which  were  being  perpetually  debased  and  altered 
by  the  wretched  administration  of  the  finances.  The  total 
circulation  of  bills  in  April,  1719,  the  date  of  the  last  decree, 
was  110,000,000  livres  ($22,000,000). 


42  HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

Meantime  the  shares  of  the  Compagnie  d'  Occident  were 
undergoing  a  remarkable  experience.  They  were  sold 
rather  slowly  at  first  and  the  principal  subscription  was  by 
the  former  stockholders  of  the  bank,  who  subscribed  their 
receipts  from  the  bank  shares  (1,125,000  livres  in  bills  of 
state  and  375,000  livres  in  specie)  for  the  stock  of  the  new 
company.  Law  found  it  necessary,  in  order  to  stimulate  the 
sale  of  the  shares,  to  buy  publicly  some  two  hundred  shares 
at  par,  of  which  200  livres  per  share  was  paid  as  a  margin, 
with  the  option  of  completing  the  transaction  in  six  months. 
Dealing  in  options  (inarche  a  prime}  was  thus  brought  into 
general  practice  for  the  first  time  in  France.  The  making 
of  the  contracts  for  the  tobacco  monopoly,  the  extension  of  the 
commercial  operations  of  the  company  and  the  wresting  of 
the  farming  of  the  revenues  from  the  Paris  brothers,  who 
had  formerly  controlled  it,  gave  a  great  stimulus  to  the  mar- 
ket value  of  the  stock,  and  Law  was  authorized  to  issue  fifty 
thousand  new  shares  at  a  premium  of  one  hundred  per  cent. , 
to  pay  the  government  the  sum  guaranteed  by  the  new  con- 
tracts. The  value  of  the  old  shares  was  maintained  by 
requiring  their  presentation  to  obtain  the  new  ones.  The 
original  issue  thus  came  to  be  known  as  the  ' '  mothers ' ' 
(meres)  of  the  second,  which  were  called  the  "  daughters  " 
{filles),  while  the  third  issue  was  known  as  the  "grand*-, 
daughters"  (petites-filles).  The  contract  with  the  govern- 
ment for  assuming  the  entire  public  debt  upon  a  pledge  by 
the  state  to  pay  annually  three  per  cent,  interest  was  author- 
ized October  12,  1719,  and  the  payment  of  the  interest  was 
assured  to  the  company  by  its  contract  for  collecting  the 
revenues.  Three  successive  issues  of  one  hundred  thousand 
shares  in  the  Compagnie  des  Indes 1  were  thought  necessary  to 
carry  through  this  gigantic  operation.  The  new  shares  were 
of  a  par  value  of  500  livres  each  but  were  issued  at  a  price  of 

1  The  name  of  the  Compagnie  d"1  Occident  was  changed  to  the 
Compagnie  des  Indes  in  May,  1719,  when  the  privileges  of  the  two 
companies  of  the  West  Indies  and  of  China  were  absorbed  by  Law's 
Company,  and  the  new  name  was  retained  until  the  dissolution  of 
the  company  in  1769. — Courtois,  20. 


BANKING  IN  FRANCE.  43 

5000  livres,  payable  ten  per  cent,  a  month.  The  presentation 
of  the  old  shares  was  not  required  for  the  purchase  of  these 
last  issues  and  the  price  was  rapidly  forced  upward  until 
10,000  livres  per  share  was  attained  in  November,  1719. 

Whatever  might  have  been  the  success  of  so  comprehensive 
a  scheme  under  sound  management,  the  fever  of  speculation 
had  forced  the  shares  to  a  point  where  a  reasonable  dividend 
was  impossible.  Law  announced  at  a  general  meeting  of 
the  shareholders  on  December  30,  1719,  a  total  revenue  of 
91,000.000  livres, — 48,000,000  from  the  interest  on  the  pub- 
lic debt,  to  be  retained  from  the  taxes  ;  12,000,000  from 
profit  on  the  farming  of  the  taxes ;  6,000,000  from  tobacco  ; 
1,000,000  from  general  taxes  not  covered  by  the  farming  of 
the  revenues;  12,000,000  from  profits  of  the  coinage  ;  and 
12,000,000  from  the  commercial  operations  of  the  company. 
The  actual  par  value  of  the  outstanding  shares  was  312,000,- 
ooo  livres,  which  would  have  afforded  a  profit  of  nearly 
thirty  per  cent.,  and  a  dividend  of  200  livres  per  share 
was  actually  declared  on  January  i,  1720;  but  the  shares 
had  been  selling  at  12,000  livres,  or  twenty-four  times  their* 
par  value,  which  afforded  an  actual  dividend  of  only  one 
and  two-thirds  per  cent.  Notwithstanding  the  doubtful 
character  of  some  of  the  profits  claimed  and  their  palpable 
insufficiency  to  pay  large  dividends  upon  such  an  inflated 
investment,  the  phrenzy  of  speculation  forced  the  shares  by 
January  6,  to  18,000  livres— thirty-six  times  their  nominal 
par  value.  The  Rue  Quincampoix,  between  the  Rue  Saint- 
Denis  and  the  Rue  Saint-Martin,  had  been  since  the  close 
of  the  reign  of  Louis  XIV.  the  meeting  place  of  speculators 
and  dealers  in  the  public  stocks.  Such  operations  attained 
a  new  extension  by  the  speculations  in  the  shares  of  the 
Compagnie  des  Indes.  Fortunes  were  won  and  lost  in  a  day 
and  feeling  became  so  violent  that  the  place  was  closed  by 
the  government  and  the  speculators  were  driven  into  obscure 
corners  in  other  parts  of  the  city,  where  they  were  constantly 
on  the  watch  for  the  police.1 

1  The  decree  of  October  25,  1720,  forbidding  speculative  operations 
in  the  public  streets  is  of  interest  because  it  established  the  sixty 


44  HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

The  New  Year  of  1720  and  the  declaration  of  the  dividend 
marked  the  apogee  of  Law's  system.  The  craze  had  sub- 
stantially run  its  course  and  the  reaction  was  setting  in. 
Prices  were  rising  under  the  impulse  of  the  excessive  issues 
of  bank-bills  and  the  more  prudent  speculators  were  endeav- 
oring to  convert  their  gains  into  more  solid  property  by  the 
purchase  of  real  estate  or  by  shipping  gold  abroad.  The 
bank  had  already  been  authorized  to  issue  1,000,000,000 
livres  and  there  had  been  issues  without  authority  and 
counterfeits,  which  were  easily  made  because  the  genuine 
bills  were  so  rapidly  and  crudely  turned  out.  Specie  began 
to  disappear  and  the  subsidence  of  speculation  made  the  bills 
redundant.  L,aw  adopted  the  now  familiar  argument  in 
favor  of  paper  money,  that  it  was  to  be  preferred  over  coin 
because  it  was  non-exportable.  A  series  of  decrees  during 
the  early  months  of  1720  sought  to  discredit  coined  money 
and  maintain  the  currency  of  the  bank-bills.  The  nominal 
value  of  coin  was  reduced  ;  the  quantity  of  specie  which  an 
individual  was  permitted  to  hold  was  limited  ;  the  sale  of 
vessels  of  gold  or  silver  was  prohibited  ;  the  carrying  of 
diamonds  and  precious  stones  was  prohibited  ;  the  circulation 
of  bills  throughout  the  realm  as  legal  tender  was  decreed  ; 
an  advantage  was  accorded  those  who  paid  certain  taxes  in 
bills  rather  than  specie  ;  and  special  jurisdiction  was  given 
the  Council  of  State  for  causes  concerning  bank-bills.1  All 
these  measures  failed  to  maintain  confidence  in  the  super- 


agents  of  exchange  (agents  de  change}  who  still  form  the  legal  body 
of  the  Paris  Bourse.  Their  places  are  transmissible  and  hereditary. 
The  Bourse  decides  what  stocks  shall  be  admitted  to  its  lists  and  only 
those  representing  a  large  capital  are  ever  listed.  The  corporation 
which  has  been  formed  by  the  members  inspires  absolute  confidence 
in  its  operations  by  voluntarily  assuming  corporate  responsibility  for 
the  acts  of  its  members  in  their  legitimate  capacity  as  brokers.  This 
corporation  has  instituted  a  clearing  house  and  was  strong  enough  in 
the  crisis  of  1882  to  borrow  80,000,000  francs  ($16,000,000)  from  the 
Bank  of  France,  guaranteed  by  the  Rothschilds  to  the  amount  of 
40,000,000  francs  and  by  the  leading  societies  of  credit  for  40,000,000 
more. — Jannet,  347-48. 
1  Courtois,  44. 


BANKING  IN  FRANCE.  45 

abundant  mass  of  paper  and  the  control  of  the  bank  was 
turned  over  to  the  Compagnie  des  hides.  The  company  was 
authorized  to  convert  at  the  will  of  the  holders  shares  in 
the  company  into  bank-bills  or  to  redeem  bills  in  shares,  at 
a  fixed  price  of  9000  livres  per  share.  The  contest  of  paper 
money  against  the  metals  was  continued  by  a  decree  of 
March  nth,  suppressing  gold  and  silver  as  legal  tender  and 
providing  for  the  confiscation  of  gold  or  silver,  whether  coin, 
bullion,  or  vessels,  when  found  in  the  possession  of  subjects. 

But  the  tide  had  turned  and  could  no  longer  be  stemmed. 
The  fall  in  the  stock  continued,  the  company  suffered  in  its 
commercial  operations  by  the  pest,  which  closed  the  free 
port  of  Marseilles,  and  a  decree  of  May  i,  1720,  scaled  the 
value  of  shares  from  month  to  month  until  they  should  be 
reduced  on  December  ist,  to  5500  livres  and  bank-bills  should 
be  reduced  to  fifty  per  cent,  of  their  par  value.  Panic  seized 
upon  every  holder  of  either  form  of  paper,  as  he  saw  the 
values  of  his  property  shrinking  under  legal  decree  with 
every  passing  day.  A  commission  was  appointed  to  exam- 
ine the  bank  and  found  that  against  3,000,000,000  livres  of 
circulation  it  held  21,000,000  livres  in  coin,  28,000,000  in 
bullion  and  240,000,000  in  commercial  bills, — less  than  ten 
per  cent,  of  assets  in  all  against  its  outstanding  notes.  A 
run  upon  the  bank  began  on  the  night  of  July  i6th,  and  the 
crowd  was  so  dense  that  a  dozen  unfortunates  were  choked 
or  trampled  under  foot.  The  corpses  were  placed  upon 
litters  and  borne  to  the  residence  of  the  Regent.  Law 
escaped  from  the  crowd  into  the  palace,  but  his  carriage  was 
broken  in  pieces  and  the  coachman  thrown  from  his  seat 
and  dragged  upon  the  ground.  The  bank  was  closed,  the 
forced  legal  tender  of  the  bank-bills  was  suspended,  the  con- 
tracts of  the  company  with  the  government  were  cancelled, 
and  the  stock  was  called  in  for  readjustment. 

A  decree  appeared  on  January  26,  1721,  known  under  the 
name  of  the  visa,  providing  for  the  liquidation  of  the  affairs 
of  the  company  and  of  the  bank  and  the  readjustment  of  the 
public  debt.  The  decree  was  attributed  to  Paris-Duverney, 
from  whom  Law  had  taken  the  farming  of  the  revenues,  and 


46  HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

was  confided  to  him  for  execution.  The  attempt  was  made 
to  readjust  private  fortunes  as  well  as  public  obligations 
upon  the  basis  which  had  prevailed  before  the  period  of 
paper  inflation  which  Law  had  inaugurated.  Those  who 
had  fled  the  country  with  their  winnings  transmuted  into 
gold,  those  who  could  command  the  royal  favor,  and  those 
who  were  able  to  keep  their  gains  in  hiding  were  the  only 
ones  who  escaped.  The  mere  transfer  of  speculative  gains 
into  real  property  did  not  prevent  the  exercise  of  arbitrary 
power  to  transfer  the  property  back  to  its  original  owners 
and  remit  the  new  owner  to  his  original  poverty.  A  regular 
scale  of  readjustment  was  prepared  by  which  the  public 
debt  was  reduced  to  its  original  volume  and  the  holders  of 
bills  and  the  stock  of  the  company  were  given  new  public 
obligations  ranging  from  one  hundred  per  cent,  of  their 
holdings  in  certain  cases  down  to  five  per  cent.,  according  as 
they  were  supposed  to  represent  real  values  or  the  profits  of 
stock  gambling. 

The  lesson  of  Law's  disastrous  schemes  and  the  painful 
readjustment  which  followed  them  prevented  for  half  a  cen- 
tury the  creation  of  any  new  bank  of  issue  in  France.  The 
success  of  the  Bank  of  England,  however,  and  the  necessity 
of  some  aid  to  commerce,  led  to  a  futile  attempt  to  found  a 
bank  under  a  decree  of  the  Council  of  State  of  January  i, 
1767, 1  and  the  establishment,  during  the  ministry  of  Turgot, 
by  a  decree  of  March  24,  1776,  of  the  Caisse  d' Escompte  du 
Commerce  (The  Bank  of  Commercial  Discount).  The  new 
institution  was  limited  to  a  strictly  banking  business,  and 
forbidden  to  borrow  except  by  its  notes  payable  at  sight. 
It  was  authorized  to  begin  operations  with  a  capital  of 
15,000,000  livres  ($3,000,000),  of  which  it  was  intended  that 
two-thirds  should  be  loaned  to  the  Treasury.  The  loan  to 
the  Treasury  not  having  been  completed  as  proposed,  the 
capital  of  the  bank  was  reduced  to  12,000,000  livres,  repre- 


1  The  proposed  institution  was  to  be  known  as  the  Caisse  d ' Escompte 
and  to  have  a  capital  of  60,000,000  livres,  but  it  never  entered  upon 
active  operations  and  was  suppressed  by  a  decree  of  March  21,  1769. 
— Courtois,  84. 


BANKING  IN  FRANCE.  47 

sented  by  four  thousand  shares  of  3000  livres  each.  Some 
of  the  most  eminent  public  men  and  financiers  of  Paris 
served  on  the  board  of  directors  of  the  bank,  and  while 
they  were  not  directly  responsible  for  its  management,1  its 
note  issues  were  kept  within  prudent  limits  and  annual 
dividends  were  declared  for  the  first  six  years,  ranging  from 
five  to  eight  per  cent. 

The  first  blow  to  the  bank's  credit  came  from  the  demands 
of  the  government.  The  growing  social  and  economic  diffi- 
culties of  France  were  brought  to  a  climax  by  the  bad  crops 
of  1783  and  caused  a  great  scarcity  of  metallic  money.  The 
new  bank,  after  having  considerably  expanded  its  commer- 
cial discounts,  made  an  advance  to  the  government  at  the 
demand  of  D'Ormesson,  of  6,000,000  livres.  It  was  brought 
face  to  face  with  the  crisis  with  a  circulation  of  45,000,000 
livres  and  with  a  cash  reserve  of  but  little  more  than  4,000,- 
ooo.  There  was  a  sudden  rush  for  the  redemption  of  the 
notes  and  the  bank  appealed  to  the  Treasury  to  reimburse 
the  6,000,000  livres  recently  loaned.  The  government  was 
in  no  condition  to  comply  with  this  demand,  but  it  was 
ready  to  employ  its  sovereign  power  to  enable  the  bank  to 
suspend  specie  payments  and  to  authorize  the  redemption  of 
bills  in  commercial  paper  or  their  non-payment  until  Jan- 
uary i,  1784,  (Decree  of  September  27,  1783).  The  bank 
was  solvent,  however,  and  had  the  courageous  support  of 
the  private  bankers  of  Paris,  who  held  a  large  proportion 
of  its  bills.  A  report  presented  by  the  lieutenant  of  police, 
M.  L,e  Noir,  showed  that  the  bills  in  circulation,  amounting 
to  44,724,000  livres,  were  offset  by  47,700,000  livres  in  good 
commercial  paper,  4,121,700  livres  in  gold  and  silver  coin 
and  bullion,  and  6,000,000  livres  held  by  the  Treasury, 


1  The  bank  really  constituted  a  partnership  en  commandite,  for 
which  a  few  individuals  were  legally  responsible,  and  the  use  of  the 
names  of  leading  financiers  as  directors  was  somewhat  akin  to  the 
modern  fraud  of  paying  men  of  high  station  for  the  use  of  their  names 
to  float  irresponsible  enterprises  ;  but  the  practice  in  this  case  appears 
to  have  grown  out  of  the  lack  of  experience  with  stock  companies 
and  to  have  involved  no  intentional  deception. 


48  HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

making  total  assets  of  57,821,700  livres  and  affording  a 
favorable  balance  of  13,097,700  livres.1 

The  loan  to  the  government  was  soon  repaid,  specie  pay- 
ments were  resumed  under  a  decree  of  November  23,  1783, 
and  the  bank  was  authorized  to  increase  its  capital  to  15,000,- 
ooo  livres,  and  for  four  years  it  continued  to  operate  free  from 
government  interference  and  with  advantage  to  the  business 
community.  Its  growing  prosperity  attracted  the  attention 
of  Calonne,  then  Controller  General,  and  he  determined  to 
turn  it  to  account  for  the  benefit  of  the  State  by  requiring 
the  deposit  of  a  guarantee  fund  with  the  Treasury.  The 
capital  was  raised  from  15,000,000  to  100,000,000  livres  and 
the  net  receipts  in  cash,  amounting  to  80,000,000  livres,  were 
deposited  to  the  amount  of  70,000,000  with  the  Treasury  and 
10,000,000  were  carried  to  the  reserve.  A  new  run  set  in  in 
August,  1787,  but  the  directors  refused  to  accept  a  decree  for 
the  suspension  of  specie  payments,  which  Lomenie  de  Brienne, 
Chief  of  the  Royal  Council  of  Finance,  was  preparing,  de- 
manded help  from  the  guarantee  fund  in  the  possession  of 
the  government,  and  promptly  met  every  obligation. 

But  the  government  was  sinking  into  the  sloughs  of  bank- 
ruptcy and  determined  to  drag  the  bank  with  it,  so  that  there 
should  be  no  stronger  credit  than  its  own  to  put  it  to  shame. 
August  1 8,  1788,  appeared  a  decree  authorizing  the  bank  to 
redeem  its  bills  in  part  in  commercial  paper.  The  decree 
was  unsought  and  its  existence  was  unknown  until  it  was 
affixed  to  the  doors  of  the  bank,  and  the  permission  to  sus- 
pend was  not  embraced  by  the  directors.  But  Necker,  who 
became  Finance  Minister  on  May  25,  1789,  continued  to  insist 
upon  secret  loans  to  the  Treasury,  and  the  government  and 
the  bank  soon  became  so  involved  with  each  other  that 
Necker  proposed  to  transform  it  into  a  national  bank.  The 
Constituent  Assembly  had  already  assumed  the  power  to 
regulate  the  bank,  as  it  regulated  all  the  established  institu- 
tions of  France,  and  ordered  it  to  pay  into  the  Treasury  80,- 
000,000  livres  of  its  bills  against  a  deposit  of  interest-bearing 
assignats.  The  bank  lost  its  credit  with  the  business  commu- 

1  Noel,  I..  90. 


BANKING  IN  FRANCE. 


49 


nity,  the  redemption  of  its  notes  in  assignats  was  de- 
creed in  1790,  bank-note  issues  were  forbidden  by  the 
law  of  August  17,  1792,  and  the  institution  was  sup- 
pressed by  a  decree  of  the  National  Convention  on  August 

24.  J793- 

The  next  three  years  were  those  of  the  consummation  of 
the  Reign  of  Terror,  the  execution  of  the  King  and  Queen, 
the  fall  of  Danton  and  Robespierre,  and  the  restoration  of 
order  under  the  Directory.  "What  institution  of  credit," 
asks  M.  Horn,  "could  have  braved  the  tempest  which  agi- 
tated the  end  of  the  eighteenth  century  ?  What  instru- 
ment of  credit  could  have  maintained  itself  against  the 
assignats,  which  destroyed  alike  the  notions  of  value  and  of 
money  ?  "  1  But  the  Saturnalia  of  fiat  money  lasted  but  lit- 
tle longer  than  in  the  time  of  L,aw.  The  same  sort  of  enact- 
ments,— making  the  paper  money  legal  tender  for  debts  at 
its  nominal  value,  fixing  maximum  prices,  punishing  those 
who  discredited  the  assignats  in  conversation,2  and  inflicting 
the  penalty  of  death  upon  those  who  kept  their  produce  from 
the  market, — quickly  ran  their  course.  The  assignats  in 
circulation  amounted  on  January  i,  1796,  to  27,565,237,396 
francs,  and  had  increased  on  September  7,  to  45,578,810,040 
francs,  when  they  were  worth  one  one-thousandth  part  of 
their  nominal  value.  The  whole  fabric  disappeared  at  a 
blow  when  the  National  Assembly  decreed  on  July  16,  1796, 
that  every  one  might  transact  business  in  whatever  money 
he  chose  and  that  the  mandates,  which  had  superseded  the 
assignats,  should  be  taken  only  at  their  current  value.  The 
effect  of  this  removal  of  the  restrictions  upon  the  natural  laws 
of  money  is  thus  strikingly  portrayed  by  Professor  MacLeod  : 

No  sooner  was  this  great  blow  struck  at  the  paper  currency,  of  mak- 
ing it  pass  at  its  current  value,  than  specie  immediately  reappeared  in 
circulation.  Immense  hoards  came  forth  from  their  hiding  places  ; 
goods  and  commodities  of  all  sorts  being  very  cheap  from  the  anxiety 
of  their  owners  to  possess  money,  caused  immense  sums  to  be  im- 
ported from  foreign  countries.  The  exchanges  immediately  turned 


1  La  Liberte  des  Banques,  317. 

2  Courtois,  99. 


50  HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

in  favor  of  France,  and  in  a  short  time  a  metallic  currency  was 
permanently  restored.  And  during  all  the  terrific  wars  of  Napoleon 
the  metallic  standard  was  always  maintained  at  its  full  value.1 

The  end  of  the  paper  money  phrensy  saw  credit  again 
raising  her  head  and  several  new  banking  institutions  under 
way.  The  first  one,  founded  in  1796,  was  known  as  the 
Caisse  des  Comptes  Courants  (Bank  of  Current  Accounts),  and 
had  a  capital  of  5,000,000  francs  ($1,000,000).  The  circula- 
tion was  20,000,000  francs  in  bills  of  500  and  TOGO  francs, 
and  bills  of  exchange  running  for  ninety  days  were  dis- 
counted at  six  per  cent.3  The  Caisse  des  Comptes  Courants 
was  created  largely  by  bankers  for  bankers,  and  a  party  of 
business  men,  to  escape  what  they  regarded  as  a  certain  de- 
gree of  favoritism,  determined  to  found  a  banking  associa- 
tion of  their  own.  They  established,  November  24,  1797,  fora 
term  of  three  years,  the  Caisse  d1  Escompte  du  Commerce  (Bank 
of  Commercial  Discounts),  which  proved  so  successful  that  it 
was  renewed  for  an  unlimited  term.  There  was  no  fixed 
capital,  but  each  new  subscriber  for  a  share  of  10,000  francs 
($2000)  increased  the  capital  by  so  much  until  in  less  than 
four  years  it  had  reached  12,000,000  francs.  Five  thousand 
francs  were  paid  on  each  share  in  cash  and  five  thousand 
francs  in  bank-bills  were  endorsed  by  the  subscriber  with  his 
own  signature  and  afterwards  countersigned  by  the  bank.3 
The  plan  proved  so  successful  that  it  was  imitated  by  the 
retailers,  who  organized  the  Comptoir  Commercial  (Commer- 
cial Bank).  The  Caisse  des  Comptes  Courants  and  the  Caisse 
d1  Escompte  accepted  reciprocally  each  others  bills  and  were 
doing  an  active  and  safe  banking  business  when  a  new  turn 
was  given  to  the  economic  history  of  France  by  the  coup 
d'ttat  of  the  Eighteenth  Brumaire  (November  9,  1799),  which 
made  Napoleon  Bonaparte  First  Consul  and  virtually  the 
supreme  ruler  of  France. 

Bonaparte  had  hardly  grasped  power  before  he  turned  to 
his  financial  advisers  for  a  plan  for  a  national  bank.  They 

1  Theory  and  Practice  of  Banking,  II.,  258. 

2  Courtois,  109. 
a  Horn,  322. 


BANKING  IN  FRANCE.  51 

had  one  ready  for  his  immediate  consideration,  bearing  a 
striking  resemblance  to  the  plan  of  the  Notary  Rouen  which 
had  been  before  the  Council  of  Five  Hundred  under  the 
government  of  the  Directory.  Less  than  three  months  after 
the  Eighteenth  Brumaire  appeared  the  decree  of  January  18, 
1800  (28  Nivose,  An  VIII),  constituting  the  Bank  of  France, 
with  a  capital  of  30,000,000  francs  in  shares  of  1000  francs 
each.  The  decree  provided  that  one-sixth  of  the  capital 
should  be  furnished  by  the  Treasury  by  an  investment  of 
half  the  funds  given  as  bonds  by  the  receivers  general,  and 
Napoleon,  members  of  his  family,  and  personal  friends  lent 
their  support  by  subscribing  for  the  shares. '  This  support 
was  necessary  to  the  success  of  the  bank,  and  it  was  not 
until  1802  that  all  the  shares  were  taken.  Vitality  was 
given  the  institution  by  the  decision  of  the  general  assembly 
of  the  Caisse  des  Comptes  Courants  to  consolidate  with  it  and 
the  transfer  of  their  offices  in  the  Place  des  Victoires.  Febru- 
ary 20,  1800,  the  bank  began  its  operations  as  a  bank  of 
issue  and  of  discount.  It  was  at  the  outset  a  private  insti- 
tution, free  from  government  interference  and  its  right  to 
issue  notes  was  far  from  exclusive. 

But  Bonaparte  did  not  view  with  patience  this  situation. 
"  One  bank  is  easier  to  watch  than  several,"  was  his  com- 
ment, and  after  the  Caisse  d^  E scorn  pie  du  Commerce  had 
refused  to  loan  money  to  the  government,  he  took  vigorous 
measures  to  drive  it  to  the  wall.  The  law  of  April  14,  1803 
(24.  Germinal,  An  XI),  gave  the  Bank  of  France  the  exclu- 
sive privilege  of  issuing  bank-bills  at  Paris,  raised  the  capital 
from  30,000,000  to  45,000,000  francs  and  decreed  that  no 
bank  should  be  established  in  the  departments  without  the 
authority  of  the  government.  The  stockholders  of  the 
Caisse  d*  Escomple  du  Commerce  filed  an  emphatic  protest 
against  the  abrogation  of  their  right  to  issue  notes.  Their 
complaints  did  not  prevent  the  passage  of  the  law,  but  the 

1  Napoleon  took  thirty  shares,  Joseph  Bonaparte  took  one  share, 
Murat  two,  Hortense  Beauharnais  ten,  Duroc  five,  General  Clark,  who 
married  Napoleon's  sister  and  died  in  San  Domingo,  one,  and  Bouri- 
enne,  five. — Noel,  I.,  97,  note. 


52  HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

management  of  the  Bank  of  France  did  what  they  could  to 
prevent  a  crisis  by  fusion  with  existing  banks  of  issue.  A 
consolidation  was  arranged  with  the  Caisse  d'  Escompte  dii 
Commerce,  which  turned  over  its  assets  and  received  bills  of 
the  Bank  of  France  in  exchange.  The  shareholders  had  the 
option  of  becoming  shareholders  of  the  Bank  of  France  with 
all  the  privileges  of  the  original  shareholders. 

The  financial  crisis  which  broke  out  upon  the  formation  of 
the  third  coalition  against  France,  after  the  rupture  of  the 
Peace  of  Amiens,  resulted  in  radical  changes  in  the  constitu- 
tion of  the  Bank  of  France.  The  preparations  for  the  cam- 
paign of  Austerlitz  required  large  expenditures  by  the 
government  and  the  syndicate  of  contractors  for  supplies  for 
the  armies  obtained  large  loans  from  the  bank  in  the  form  of 
bills.  The  bills  began  to  be  presented  for  redemption  at  the 
rate  of  two  or  three  million  francs  a  week.  The  coin  reserve 
of  the  bank  was  reduced,  specie  was  demanded  by  the  bank 
in  the  settlement  of  its  balances  with  bankers  in  the  depart- 
ments, and  accommodation  bills  of  exchange  were  largely 
drawn  by  the  contractors  to  obtain  new  loans,  with  the  result 
of  new  note  issues  and  new  demands  for  redemption.  The 
circulation,  which  before  1803  had  never  exceeded  30,000,000 
francs,  surpassed  80,000,000  and  the  bills  began  to  fall  below 
par.  The  council  of  the  regency  limited  redemptions  to  a 
fixed  sum  per  day,  and  in  course  of  time  the  contraction  of 
discounts  and  the  settlement  of  balances  due  the  bank  re- 
established equilibrium.  The  victory  of  Austerlitz  (Decem- 
ber 2,  1805)  assisted  in  restoring  confidence,  and  Napoleon, 
the  morning  after  his  return  to  Paris,  summoned  a  council  to 
discuss  the  crisis  which  had  absorbed  his  thoughts  even  upon 
the  field  of  battle.1 

The  Emperor  was  convinced  that  bad  management  had 
much  to  do  with  the  crisis,  and  within  twenty-four  hours  of 
the  council  M.  Mollien  succeeded  M.  de  Barbe-Marbois  as 
Minister  of  the  Treasury  and  was  charged  with  the  prepara- 
tion of  a  new  plan  of  organization  for  the  bank.  He  recom- 
mended that  the  bank  be  linked  with  the  State  and  that  it 

1  Noel,  I.,  104. 


BANKING  IN  FRANCE.  53 

be  the  only  institution  in  the  country  authorized  to  issue 
credit  paper.  "  The  bank,"  he  declared,  "  does  not  belong 
only  to  its  stockholders ;  it  belongs  also  to  the  State,  since 
the  latter  has  given  it  the  privilege  of  creating  money." 
This  policy  was  very  pleasing  to  the  Emperor  and  was 
promptly  put  in  practice.  The  law  of  April  22,  1806,  in- 
creased the  capital  of  the  bank  from  45,000,000  to  90,000,000 
francs  and  confided  its  direction  to  a  governor  and  two  sub- 
governors  named  by  the  head  of  the  State,  but  paid  by  the 
bank.  The  duration  of  the  privileges  of  the  bank  was 
extended  fifteen  years  beyond  the  date  fixed  by  the  Act  of 
1803,  until  September  24,  1843.  It  was  the  purpose  of  Napo- 
leon to  make  the  bank  national  in  its  operations  as  well  as 
in  name,  and  a  decree  of  May  18,  1808,  gave  the  exclusive 
privilege  of  note  issues  to  the  bank  in  every  town  in  which 
it  established  branches. 

The  fall  of  Napoleon  caused  a  temporary  suspension  of  the 
operations  of  the  bank.  The  council  ordered  the  burning  of 
the  bills  which  were  in  the  vaults  ready  for  issue  and  the 
withdrawal  of  current  accounts  by  depositors.  The  reserves 
fell  to  5,000,000  francs  ($1,000,000)  the  circulation  to  10,- 
000,000  francs  and  current  accounts  to  1,300,000  francs.  The 
prompt  return  of  peace  restored  confidence,  the  circulation 
was  increased  to  70,000,000  francs  and  the  reserves  rose  to 
93,000,000  francs.  The  government  of  the  restoration,  how- 
ever, was  not  especially  friendly  to  the  financial  creation  of 
the  Napoleonic  dynasty.  The  management  of  the  bank 
themselves  were  ready  to  renounce  exclusive  privileges  in 
the  departments,  provided  the  stockholders  were  allowed  to 
resume  the  selection  of  the  governor  and  his  assistants.  This 
project  was  not  accepted  by  the  Chambers,  but  the  branches 
at  Rouen  and  Lyon  were  abandoned  and  were  succeeded  by 
departmental  banks  of  a  type  which  soon  spread  to  the  lead- 
ing cities  of  France. 

These  departmental  banks  were  entirely  independent  of 
the  Bank  of  France,  and  were  authorized  to  issue  their  own 
notes.  They  accommodated  themselves  to  local  necessities, 
their  officers  were  acquainted  with  local  credits,  their  profits 


54 


HISTORY  OF  MODERN  BANKS  OF  ISSUE. 


augmented,  and  their  operation  contributed  greatly  to  the 
development  of  the  industrial  activity  of  the  nineteenth  cen- 
tury in  France.  Institutions  of  this  sort  were  founded  in 
nine  principal  cities,  and  some  idea  of  the  extent  of  their 
operations  and  of  their  success  may  be  formed  from  the  fol- 
lowing table  of  the  principal  items  of  their  balance  sheets 
for  1847  : l 


BANK. 

MEAN  COIN 
RESERVE. 

MEAN 
DISCOUNTS. 

MEAN 
CIRCULATION. 

DIVIDENDS. 

Francs. 

Francs. 

Francs. 

Per  Cent. 

Rouen, 

4,500,000 

10,100,000 

I2,OOO,OOO 

14.4 

Nantes, 

I,7OO,OOO 

6,4OO,OOO 

4,300,000 

9-7 

Bordeaux, 

I2,6OO,OOO 

I3,9OO,OOO 

2O,9OO,OOO 

I6.3 

Lyon, 

10,400,000 

23,100,000 

I9,7OO,OOO 

28.8 

Marseilles, 

6,400,000 

14,000,000 

l6,5OO,OOO 

12.9 

Havre, 

I,OOO,OOO 

7,OOO,OOO 

4,400,000 

6.8 

Lille, 

I,8OO,OOO 

5,400,000 

4,5OO,OOO 

9.6 

Toulouse, 

1,600,000 

2,400,000 

4,8OO,OOO 

11.7 

Orleans, 

1,100,000 

2,600,000 

3,000,000 

II-3 

Total, 

41,700,000 

84,900,000 

90,100,000 

This  exhibit  shows  a  circulation  for  these  nine  banks  in 
1847  of  about  $17,500,000  secured  by  a  coin  reserve  of 
$8,000,000,  by  means  of  which  loans  had  been  made  to  the 
amount  of  $18,000,000.  The  large  profits  obtained  by  these 
departmental  banks  (indicated  in  the  table  of  dividends) 
were  reflected  in  the  high  prices  of  their  capital  stock.  The 
shares  all  had  a  par  value  of  1000  francs  ($200),  and  the 
quotations  in  1847  were  :  Bank  of  Rouen,  2650  francs  ; 
Nantes,  1750  fr.  ;  Bordeaux,  2200  fr.  ;  I/yon,  3770  fr.  ;  Mar- 
seilles, 1970  fr.  ;  Havre,  1330  fr.  ;  Lille,  1700  fr.  ;  Toulouse, 
1200  fr.  ;  Orleans,  1 8 10  fr.  The  deposits  were  comparatively 
small,  amounting  at  their  maximum  in  1847  to  16,800,000 
francs  ($3,250,000).  Deposit  banking  was  almost  unknown 
in  the  smaller  cities  of  France  and  these  departmental  banks 

1  This  table  is  compiled  from  the  appendix  to  Courtois's  Histoire 
des  Banques  en  France,  338-41,  and  is  given  in  round  figures  because 
the  tables  appear  there  in  millions  of  francs,  instead  of  being  fully 
carried  out.  The  same  figures  appear  in  Horn's  La  Liberti  des 
ques,  361-64. 


BANKING  IN  FRANCE.  55 

could  never  have  made  substantial  dividends  or  acquired  any 
considerable  volume  of  business  without  the  power  to  trans- 
mute their  assets  into  circulating  notes. 

The  majority  of  the  departmental  banks  were  founded 
between  1835  and  1840, — the  period  when  the  failure  of 
the  Bank  of  France  to  meet  expanding  commercial  needs 
began  to  be  most  keenly  felt.  The  Bank  of  France  was 
generally  regarded  as  an  institution  for  bankers  rather  than 
for  merchants  and  the  latter  obtained  their  discounts  at  the 
bank  through  the  intervention  of  private  discount  houses. 
Many  of  these  houses  suspended  during  the  political  dis- 
turbances of  1830,  and  it  became  necessary  to  appoint  a  royal 
commission  to  report  upon  the  commercial  and  industrial 
situation  and  "to  propose  measures  suitable  to  restore  to 
business  transactions  and  the  circulation  their  usual  regular- 
ity." The  proposition  which  became  law  on  October  17, 
1830,  proposed  to  make  loans  directly  from  the  Treasury 
and  fixed  the  amount  at  30,000,000  francs  ($6,000,000).  A 
discount  office  (Comptoir  d' Escompte)  was  established  at  Paris 
with  a  capital  of  1,300,000  francs,  which  it  was  authorized 
to  lend  at  four  per  cent,  on  bills  upon  Paris  and  at  five 
per  cent,  on  those  upon  the  provinces.  Various  amounts 
were  afterwards  added  to  the  capital  and  the  comptoirwas 
continued  with  the  guarantee  of  the  City  of  Paris  until 
September  30,  1832.  The  total  discounts  from  December 
31,  1830,  covered  59,928  pieces  of  commercial  paper  amount- 
ing to  33,191,433  francs.  Similar  offices  were  established 
in  many  of  the  departments  and  contributed  with  the  di- 
rect government  loans  towards  the  accommodation  of  in- 
dustry. The  government  commission  made  loans  in  Paris 
for  periods  of  twelve,  eighteen,  and  twenty- four  months,  dis- 
tributing them  with  some  reference  to  the  number  of  laborers 
employed,  and  assisted  nearly  450  establishments  in  fifty-three 
departments  outside  of  Paris,  employing  more  than  eighty 
thousand  men.1  The  amount  of  these  loans  reported  still 
bad  or  doubtful  in  1870  was  905,312  francs  ($180,000). 

A  similar  device  was  resorted  to  again  after  the  revolution 

1  Courtois,  137-45. 


56  HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

of  1848^  The  country  was  then  emerging  from  the  effects 
of  a  financial  crisis  and  the  discount  houses  had  again  lost 
public  confidence.  The  government  on  this  occasion  sought 
the  co-operation  of  the  business  community  in  establishing 
discount  offices.  They  required  that  a  third  of  the  capital 
be  furnished  by  individuals  or  municipalities,  the  other  two 
thirds  being  represented  by  Treasury  bonds  and  municipal 
obligations.  Some  of  the  offices  received  in  addition  a  loan 
in  specie,  upon  which  they  were  required  to  pay  four  per 
cent,  interest  to  the  Treasury.  Most  of  these  loans  were 
reimbursed  at  the  end  of  two  years  and  several  of  the  dis- 
count offices  afterwards  repaid  the  capital  advanced  by  the 
State  and  became  private  banks.  The  Paris  office  became 
the  Comptoir  d^ Escompte ,  which  established  branches  in 
India,  Japan,  and  the  Antilles,1  and  carried  on  some  large 
operations  in  finance.  It  was  wrecked  by  advances  of  130,- 
000,000  francs  to  the  great  copper  syndicate  in  1888,  and  its 
ruin  was  proclaimed  by  the  suicide  of  the  director,  M. 
Denfert-Rochereau,  on  March  5,  1889. a  The  Bank  of  France 
was  compelled  from  1848  to  1852  to  make  many  renewals 
of  its  discounts,  but  the  amount  thus  outstanding  was  re- 
duced on  December  31,  1856,  to  772,500  francs  ($i 50,000). 3 

The  success  of  the  departmental  banks  was  already  so 
great  before  1840  that  the  Bank  of  France  was  stimulated  to 
avail  itself  again  of  the  right  to  establish  branches  in  the 
leading  cities  of  the  country  and  a  contest  which  has  not  yet 
ended  arose  among  bankers  and  economists  as  to  the  relative 
wisdom  of  granting  a  monopoly  of  note  issues  to  a  single 
institution  or  permitting  such  issues  by  local  banks.  The 
advocates  of  monopoly  won  a  partial  triumph  by  the  Act  of 
June  30,  1840,  which  prolonged  the  privileges  of  the  Bank 
of  France  until  December  31,  1867,  and  declared  that  no 
departmental  bank  should  thenceforth  be  established,  nor 
the  privileges  of  existing  banks  prolonged,  except  by  virtue 
of  a  special  law.  The  ordinance  of  March  25,  1841,  which 

1  Courcelle-Senueil,  194. 

2  Jannet,  325-26. 

3  Courtois,  178-187. 


BANKING  IN  FRANCE.  57 

fixed  the  status  of  the  branches,  is  the  law  still  in  force,  and 
gave  to  the  branches  the  exclusive  privilege  of  issuing  notes 
in  the  cities  where  they  were  established.  Even  the  increase 
in  the  number  of  the  departmental  banks  and  in  the  branches 
of  the  Bank  of  France  had  not  been  adequate  to  supply  the 
growing  demand  for  discounts,  and  in  1837  Jacques  lyaffitte 
founded  the  Caisse  Generate  du  Commerce  et  de  V Industrie 
(General  Bank  of  Commerce  and  Industry),1  with  a  capital 
of  15,000,000  francs.  The  absence  of  authority  to  issue 
circulating  notes  was  evaded  by  the  issue  of  bills  payable  to 
order  after  five,  fifteen,  and  thirty  days,  with  interest,  and 
for  three  months  without  interest.  The  bills  payable  after 
five  days  were  the  most  sought  for  and  were  circulated 
with  an  indorsement  in  blank  which  permitted  them  to  pass 
from  hand  to  hand. 

The  overthrow  of  the  government  of  Louis  Philippe  in 
February,  1848,  came  on  the  heels  of  the  financial  crisis  of 
1847,  and  the  combination  of  the  two  events  caused  a  long 
list  of  failures  and  the  general  suspension  of  specie  pay- 
ments by  authority  of  the  provisional  government.  The 
suspension  of  specie  payments  was  accompanied  by  decrees 
giving  forced  legal  tender  character  to  bank-notes,  both  those 
issued  by  the  Bank  of  France  and  those  issued  by  depart- 
mental banks,8  but  legal  tender  circulation  was  given  the 
notes  of  the  departmental  banks  only  within  the  departments 


1  The  Bank  of  France  was  unwilling  that  the  name  Banque  should 
be  assumed  by  any  other  institutions  than  itself  and  the  departmental 
banks.     There  was  no  law  on  the  subject,  as  in  England  and  the 
United  States,  but  the  object  was   attained  by  the  suggestion  that 
cordial  relations  would  not  be  established  with  the  new  institution  if 
it  called  itself  a  bank. — Courtois,  155,  note. 

2  The  opponents  of  monopoly  lay  stress  upon  the  fact  that  the  Bank 
of  France  was  forced  first  to  seek  the  suspension  of  specie  payments, 
and  it  was  not  until  ten  days  later  (March  25,  1848)  that  the  same 
privilege  was  extended  to  the  departmental  banks,  which  had  thus 
far  steadily  met  all  demands.     The  circulation  of  the  Bank  of  France 
was  fixed  by  legal  decree  at  a  maximum  of  350,000,000  francs  ($70,000,- 
ooo)  and  limits  were  fixed  for  each  of  the  departmental  banks,  amount- 
ing to  an  aggregrate  of  102,000,000  francs  (520,400,000). — Horn,  368-70. 


58  HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

in  which  they  were  established.  This  policy,  whether  inten- 
tionally or  not,  paralyzed  the  action  of  the  independent 
banks  and  gave  a  color  of  justification  for  the  decrees  of 
April  27  and  May  2,  1848,  providing  for  the  fusion  of  the 
departmental  banks  with  the  Bank  of  France  and  limiting 
the  issue  of  bills  to  the  central  institution  and  its  branches. 
The  language  of  the  decree  based  the  consolidation  upon  the 
ground  "that  the  bills  of  the  departmental  banks  form  in 
certain  localities  special  monetary  signs,  whose  existence 
injects  a  deplorable  perturbation  into  all  transactions  ;  and 
that  the  essential  interests  of  the  country  imperiously  demand 
that  every  bank-bill  declared  to  be  legal  money  shall  be  able 
to  circulate  equally  in  all  parts  of  the  land."  '  The  govern- 
ment thus  touched  upon  the  weakest  feature  of  the  depart- 
mental system — the  lack  of  interchangeability  of  the  various 
note  issues.  This  was  in  part  the  result  of  the  government's 
own  action  in  limiting  the  legal  tender  quality  of  the  notes, 
but  it  was  also  true  that  there  was  no  association  among  the 
banks  which  might  have  kept  their  notes  in  circulation 
without  the  legal  tender  quality.  *  The  Bank  of  France  was 
given  the  aggregate  circulation  of  the  pre-existing  banks 
and  the  maximum  was  raised  by  decree  of  December  22, 
1849,  to  525,000,000  francs. 

The  fusion  of  the  departmental  banks  with  the  Bank  of 
France  resulted  in  an  increase  of  the  capital  of  the  central 
institution  by  the  exact  amount  of  the  capital  of  the  nine 
departmental  banks.  The  capital  of  the  central  bank  had 
been  reduced  in  1823  by  the  purchase  of  outstanding  shares 
to  67,900,000  francs  and  was  increased  by  the  absorption  of 
the  departmental  banks  to  91,250,000  francs  ($18,000,000). 
So  strongly  did  the  current  of  centralization  run  that  it  was 
proposed  to  unite  the  bank  to  the  public  domain  under  the 
name  of  the  National  Bank  of  France,  but  the  Assembly  was 
unwilling  to  increase  the  distrust  already  felt  in  business 
circles  by  so  radical  a  departure  and  rejected  the  proposals.3 

1  Lois  et  Statuts,  67-68. 
2Courtois,  175-6. 
3  Noel,  I.,  114. 


BANKING  IN  FRANCE.  59 

The  forced  legal  tender  of  the  bills  came  to  an  end  by  the 
law  of  August  6,  1850.  A  new  increase  of  capital  was  made 
by  the  law  of  the  Empire  of  June  9,  1857,  and  the  charter  of 
the  bank  was  extended  to  December  31,  1897.  *ts  existing 
privileges  were  confirmed  and  a  concession  was  made  to  the 
recent  growth  of  economic  opinion,  in  favor  of  controlling 
the  foreign  exchanges  through  the  discount  rate,  by  exempt- 
ing the  bank  from  the  usury  laws.1  The  new  charter  re- 
quired that  branches  be  established  within  ten  years  in  all 
the  departments,  but  it  was  not  until  fifteen  years  after  the 
time  set  that  this  requirement  was  fully  complied  with.  The 
increase  of  capital  was  justified  by  the  immense  expansion 
of  industry  by  machinery  and  the  building  of  railroads,  and 
the  requirement  of  a  branch  in  every  department  made  it  the 
more  imperative.  The  capital  was  therefore  doubled  and 
the  91,250  new  shares  were  issued  at  noo  francs,  of  which 
the  premium  of  100  francs  was  destined  to  strengthen  the 
reserve.  The  government  borrowed  100,000,000  francs  of 
the  money  subscribed  for  the  increase  of  capital  upon  a 
pledge  of  three  per  cent,  securities. 

The  strength  of  the  bank  proved  a  powerful  support  for 
the  railway  enterprises  which  were  now  being  floated  in 
nearly  every  department.  The  quotation  of  the  stock  of  the 
new  companies,  which  had  not  yet  had  time  to  complete 
their  lines,  had  fallen  very  low  when  ten  of  the  leading  com- 
panies formed  a  syndicate  and  appealed  to  the  bank  for 
assistance.  A  contract  was  signed  by  which  the  bank 
opened  a  credit  in  favor  of  the  companies  on  the  deposit  of 
their  obligations  and  agreed  to  market  them  under  favorable 
conditions.  Two  hundred  and  forty  million  of  francs  ($46,- 
300,000)  of  obligations  were  disposed  of,  150,000,000  by 
private  sales  and  90,000,000  by  public  subscription,  during 
1858,  and  the  quotations  were  carried  upward  from  260  francs 
to  290  francs  within  the  year.  The  only  benefit  derived  by 
the  bank  from  this  operation  was  the  interest  on  the  advances 


1  Lois  et  Statuts,  81.  The  earnings  above  six  per  cent,  were  required 
to  be  carried  to  a  permanent  surplus  fund,  which  has  stood  for  more 
than  twenty  years  at  8,002,313  francs. 


60  HIS  TOR  Y  OF  MODERN  BANKS  OF  ISSUE. 

to  the  companies,  which  amounted  to  449,600  francs,  but 
the  operation  was  so  successful  that  sales  through  the 
agency  of  the  bank  were  continued  in  1859  and  the  bank 
charged  a  commission  of  50  centimes  for  each  obligation 
sold,  deriving  a  premium  of  440,000  francs  from  the  transac- 
tion. Similar  operations  were  continued  for  several  years, 
with  handsome  profits  to  the  bank  and  great  benefit  to  the 
railways  in  placing  their  obligations  and  obtaining  the  neces- 
sary capital  for  construction. 

The  history  of  the  Bank  of  France  since  1870  is  deeply 
colored  by  the  national  struggle  with  Germany.  The  bank 
lent  its  support  to  the  government  at  the  outset  ;  it  received 
the  privilege  of  legal  tender  for  its  notes  and  the  suspension 
of  specie  payments  ;  it  suffered  from  the  ravages  of  the 
Commune,  and  it  played  a  large  part  in  the  settlement  of 
the  great  war  indemnity.  The  management  of  the  bank 
was  prudent,  and  its  credit  suffered  but  slight  impairment 
under  the  strain  of  national  disaster  and  civil  discord.  The 
bank  advanced  50,000,000  francs  to  the  government  on  July 
1 8,  1870,  four  days  after  hostilities  were  voted,  secured  by 
Treasury  bonds  running  for  three  months.  Other  advances 
up  to  the  close  of  the  war  carried  the  total  to  1,470,000,000 
francs  ($280,000,000).  The  suspension  of  specie  payments 
was  authorized  on  August  i2th,  with  only  one  dissenting  vote 
in  the  Chamber  of  Deputies.  This  step  was  not  taken  at 
the  request  of  the  bank,  or  because  of  any  severe  pressure 
upon  it  for  gold,  but  with  the  view  of  tying  up  the  gold 
reserve  for  the  benefit  of  the  government  in  case  of  military 
necessity.1 

The  restoration  of  specie  payments  in  1850  had  been  ac- 
companied by  the  removal  of  any  limitation  upon  note 
issues,  which  had  gradually  expanded  with  increasing  com- 
mercial development  to  1,439,000,000  francs  ($275,000,000) 
in  1869.  A  limit  of  1,800,000,000  francs  was  imposed  by 
the  law  of  August  12,  1870,  which  was  raised  two  days 
latter  to  2,400,000,000  francs.  Gold  jumped  to  a  premium 
of  fifteen  per  cent.,  but  the  premium  fell  in  a  few  days  ta 

1  Courtois,  258. 


BANKING  IN  FRANCE.  6 1 

one  per  cent,  or  even  less  and  did  not  rise  materially,  in 
spite  of  the  disasters  of  the  army,  until  the  great  demand  for 
foreign  exchange  in  paying  the  war  indemnity.  The  pre- 
mium then  rose  as  high  as  twenty-five  per  cent.,  representing 
apparently  one  of  the  few  cases  where  the  price  of  gold  has 
risen  as  the  result  of  a  special  demand  without  affecting  the 
prices  of  commodities  or  the  credit  of  the  paper  circulation. 
The  necessity  of  a  large  circulating  medium  led  to  a  further 
extension  of  the  limit  of  issue  on  December  29,  1871,  to 
2,800,000,000  francs,  and  the  great  loan  of  three  milliards 
was  the  occasion  for  another  extension,  July  15,  1872,  to 
3,200,000,000  francs.  The  law  of  December  29,  1871,  author- 
ized the  issue  of  notes  for  five  francs  and  ten  francs.  The 
limit  of  circulation  was  not  again  raised  until  after  the  re- 
sumption of  specie  payments.  Resumption  was  set  by  the 
law  of  August  3,  1875,  for  the  time  when  the  debt  of  the 
government  to  the  bank  should  be  reduced  to  300,000,000 
francs.  This  condition  was  formally  complied  with  by  a 
payment  to  the  bank  of  10,000,000  francs  on  December  31, 
1877,  but  the  bank  had  already  been  paying  five-franc  pieces 
in  silver  since  November  7,  1873,  and  twenty-franc  gold 
pieces  since  November,  I874.1 

The  Bank  of  France  was  saved  from  complete  destruction 
during  the  reign  of  the  Commune  in  Paris,  in  the  spring  of 
1871,  by  appeasing  with  small  sums  the  appetites  of  the 
hungry  Communist  leaders.  The  latter  first  drew  out  in 
instalments  the  sum  of  9,401,819  francs,  which  was  on  de- 
posit to  the  credit  of  the  City  of  Paris,  and  when  this  was 
exhausted  demanded  several  millions  more.  The  bank 
yielded  grudgingly  under  the  compulsion  of  force  and  with 
the  approval  of  the  Ministry  of  Finance  at  Versailles.  The 
Communists,  after  the  capture  of  one  of  the  gates  of  Paris 
by  the  regular  army  on  May  22d,  set  fire  to  the  Tuileries  and 
sent  one  of  their  officers  to  the  bank  to  demand  the  imme- 
diate payment  of  700,000  francs  for  the  wages  of  the  National 
Guard.  The  Marquis  de  Ploeuc,  the  Assistant  Governor, 
temporized  as  far  as  possible  by  advancing  200,000  francs 

1  Arnaune,  349. 


62  HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

and  refusing  the  remainder  upon  the  ground  that  so  large  an 
advance  required  the  consent  of  the  Council  of  Regents  of 
the  bank.  The  refusal  exasperated  the  Communist  leaders, 
who  threatened  to  bring  the  bank  to  terms  by  two  battalions 
and  two  pieces  of  cannon.  The  bank  yielded,  upon  the 
written  demand  of  the  Committee  of  Public  Safety,  endorsed 
by  M.  Jourde,  the  financial  delegate  of  the  Commune,  that 
"  If  this  sum  is  not  delivered,  the  bank  will  be  immediately 
invaded  by  the  Communal  Guard."  1  M.  Jourde  was  obliging 
enough,  when  a  new  demand  was  made  for  500,000  francs 
on  May  23d,  to  deliver  a  receipt  endorsed  with  the  declaration 
that  ' '  The  refusal  of  this  sum  would  involve  the  seizure  of 
the  bank."  The  next  day  the  regular  army  of  Versailles 
was  in  the  heart  of  Paris  and  the  bank  was  safe  from  further 
robbery.  The  advances  on  behalf  of  the  City  of  Paris  were 
recognized  as  a  debt  of  the  city  and  counted  into  the  loan 
for  210,000,000  francs  contracted  with  the  bank  on  August 
30,  1871.  The  bank  was  less  successful  with  the  general 
government  and,  after  a  long  course  of  negotiations,  was 
obliged  to  charge  7,293,383  francs  to  the  account  of  profit 
and  loss.2 

The  Bank  of  France  played  an  important  part  in  the  most 
remarkable  transaction  in  the  history  of  foreign  exchange — 
the  payment  of  the  great  war  indemnity  levied  upon  France 
by  Germany.  A  detailed  account  of  the  process  of  payment 
was  submitted  to  the  National  Assembly  in  1875  by  M.  Leon 
Say,  and  forms  one  of  the  most  instructive  chapters  of  mod- 
ern financial  history.  The  definitive  treaty  of  peace,  signed 
at  Frankfort  on  May  10,  1871,  called  for  the  payment  by 
France  to  Germany  of  five  milliards  of  francs  ($1,000,000,- 
ooo).  Five  hundred  millions  were  to  be  paid  thirty  days 
after  the  restoration  of  order  in  Paris,  one  thousand  millions 
during  the  year  1871,  five  hundred  millions  on  May  i,  1872, 
and  three  thousand  millions  on  March  2,  1874,  with  five  per 
cent,  interest  on  the  last  payment.  The  framers  of  the 
treaty  appreciated  the  difficulty  of  making  such  an  immense 

1  Noel,  I.,  122. 

2  Noel,  I.,  200. 


BANKING  IN  FRANCE.  63 

transfer  of  credit  without  upsetting  the  financial  fabric  of 
Europe  and  provision  was  made  that  payment  might  be 
made  in  gold  or  silver,  in  notes  of  the  banks  of  England, 
Prussia,  Holland,  or  Belgium,  or  in  first  class  bills  of  ex- 
change. Bills  not  payable  in  Germany  were  to  be  valued  at 
their  net  proceeds  after  deducting  the  cost  of  collection.  It 
was  afterwards  agreed  that  the  portion  of  the  Eastern  Rail- 
way of  France  which  was  situated  in  the  ceded  province  of 
Alsace,  and  was  the  property  of  the  French  government, 
should  be  accepted  for  325,000,000  francs  of  the  indemnity, 
and  that  125,000,000  francs  should  be  received  in  notes  of 
the  Bank  of  France. 

Three  things  had  to  be  accomplished  in  order  to  pay  the 
indemnity  within  the  time  set.  The  credits  had  to  be  trans- 
ferred to  the  French  government  by  taxation  or  the  sale  of 
securities  ;  the  proceeds  had  to  be  converted  into  obligations 
acceptable  to  the  German  government ;  and  these  obligations 
had  to  be  paid  or  transferred  to  the  credit  of  Germany.  The 
first  step  was  taken  by  means  of  an  advance  from  the  Bank 
of  France  and  the  placing  of  public  loans.  The  bank 
advanced  1,530,000,000  francs  ($300,000,000)  to  enable  the 
government  to  meet  promptly  the  two  payments  required 
during  1871.  One  of  the  conditions  of  the  payment  of  the 
indemnity  was  that  German  troops  should  occupy  French 
soil  until  the  payments  were  completed.  M.  Thiers,  the 
president  of  the  new  republic,  determined  to  free  the  coun- 
try from  foreign  occupation  at  the  earliest  possible  moment 
by  anticipating  the  payments.  Two  loans  were  authorized, 
— one  for  2,225,994,045  francs  ($430,000,000)  in  the  summer 
of  1871,  and  one  of  3,498,744,639  francs  ($675,000,000)  in 
the  summer  of  1872.  They  were  subscribed  many  times 
over  and  the  government  thereby  obtained  the  funds  for 
completing  the  payments  and  liberating  French  soil  in  the 
summer  of  1873. 

One  of  the  striking  results  of  this  loan  was  to  bring  from 
the  hoards  of  the  French  peasants  and  small  shop-keepers 
the  gold  and  silver  which  had  been  accumulating  for  genera- 
tions. It  was  the  initiation  of  whole  classes  of  the  French 


64  HISTORY  OF  MODERN   BANKS  OF  ISSUE. 

people  into  dealing  with  negotiable  securities.  The  time 
was  nearly  ripe  in  the  progress  of  modern  financiering  for 
this  change  in  the  habits  of  the  people,  but  it  required  a  loan 
which  appealed  to  their  patriotism  and  carried  a  high  guaran- 
tee of  safety  to  definitely  break  down  the  old  habit  of 
hoarding  and  establish  the  new  habit  of  investment.1  The 
subscriptions  to  the  second  loan  were  934,276,  and  the 
amount  subscribed  was  13,252,455,930  francs  at  Paris,  4,513,- 
445,566  francs  in  the  provinces,  and  26,050,195,054  francs  in 
foreign  countries.  The  foreign  subscriptions,  numbering 
107,612,  were  largely  speculative  and  the  majority  were  made 
by  the  great  financial  houses  as  a  means  of  supporting  their 
correspondents  in  Paris.  The  bulk  of  the  loan  tended 
eventually  into  the  hands  of  Frenchmen.  The  hoards  of 
gold  and  silver  brought  into  the  market  from  the  provincial 
subscribers  went  to  swell  the  monetary  circulation  and 
enabled  the  Bank  of  France  within  a  few  years  to  accumu- 
late a  coin  reserve  nearly  twice  as  large  as  it  had  ever 
before  held.  While  375,000,000  francs  (§73,000,000)  in  gold 
left  the  country  in  the  three  years  1871-73  and  the  reserve  of 
the  Bank  of  France  declined  as  low  in  1871  as  399,000,000 
francs,  the  j^ellow  metal  came  pouring  back  in  the  next  few 
3rears,  and  in  1876  the  reserve  of  gold  alone  in  the  bank  stood 
at  1,530,400,000  francs  ($300,000,000). 

Another  striking  feature  of  the  payment  of  the  war  in- 
demnity was  the  development  of  the  use  of  commercial 
credit  for  transferring  funds  from  one  country  to  another. 


1  M.  L,eroy-Beaulieu  computes  an  increase  in  French  fund-holders 
from  550,000  in  1870  to  1,000,000  in  1876,  counting  only  permanent 
investors  and  excluding  speculative  holdings.  This  would  represent 
about  one  in  eight  of  the  heads  of  families  in  France.  The  sales  of 
public  securities  in  the  departments  increased  from  4,299,425  in  1869 
to  24,272,094  in  1873. — La  Science  des  Finances,  II.,  220-25.  The  ef- 
fect of  the  popular  subscriptions  may  be  traced  also  in  the  reduction 
of  the  balances  in  the  Caisse  d'Epargne  (Savings  Bank)  of  Paris, 
which  fell  from  54,180,747  francs  (f  10,500,000)  on  January  i,  1870,  to 
35,454,124  francs  ($7, ooo,ooo)on  January  i,  1873,  the  latter  being  the 
lowest  point  reached  since  1850. — Vide  Bulletin  de  Statistique,  Oct., 
1895,  XXXVIII.,  374-77- 


BANKING  IN  FRANCE.  65 

The  aggregate  payments  consisted  of  only  742,334,079  francs 
($  143,000,000)  in  all  forms  of  currency,  including  bank-notes, 
and  4,248,326,374  francs  ($820,000,000)  in  bills  of  exchange. 
The  loss  in  the  monetary  circulation  of  France  was  less  than 
the  sum  of  coin  and  bank-notes,  because  some  of  the  bank- 
notes were  purchased  by  exchange  in  foreign  countries  and 
others  were  German  notes  which  had  drifted  into  France 
with  the  German  army.  The  real  specie  payments  were 
273,003,058  francs  ($52,600,000)  in  French  gold  and  239,- 
291,875  francs  ($46,000,000)  in  French  silver.  The  essential 
work  of  completing  the  payments  was  done  by  the  purchase 
by  the  government  of  bills  of  exchange  drawn  by  French- 
men upon  their  credits  in  every  quarter  of  the  world.  Brit- 
ish bills  were  the  most  plentiful  upon  the  Paris  market  and 
the  heavy  purchases  of  the  French  government  threw  much 
of  the  monetary  stress  upon  England  and  compelled  the 
Bank  of  England  to  maintain  high  discount  rates  all  through 
1872  and  I873.1  The  purchase  by  the  government  of  a  bill 
drawn  by  a  French  merchant  upon  an  English  customer 
permitted  the  transmission  of  the  bill  to  the  German  gov- 
ernment, which  could  then  draw  upon  London  for  the  gold 
or  simply  direct  the  deposit  of  the  proceeds  to  their  credit  in 
the  London  Joint  Stock  Bank,  which  was  their  London 
agent.  If  the  Frenchman  who  sold  his  bill  of  exchange  to 
the  government  was  a  purchaser  of  the  new  public  loan,  the 
result  of  the  process  was  the  transformation  of  his  claim 
against  his  English  customer  into  a  claim  against  his  own 
government. 

One  of  the  incidents  of  this  great  operation  in  exchange 
was  the  fall  in  the  price  of  foreign  securities  on  the  Paris 
market  and  their  flight  to  other  countries,  where  their  quo- 
tations remained  comparatively  undisturbed.  These  influ- 
ences operated  most  directly  upon  what  are  known  on  the 
European  exchanges  as  "  international  securities,"  because 
they  are  known  and  quoted  in  the  leading  markets  of  the 
world.  The  cause  of  their  decline  on  the  Paris  market  in 
1871  was  the  eagerness  of  Frenchmen  to  transfer  their  capi- 

1  Gilbart,  II.,  384. 

5 


66  HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

tal  into  the  obligations  of  their  own  country.  The  result 
of  the  decline  was  not  only  the  sale  of  the  securities  offered 
to  brokers,  but  a  flood  of  foreign  money  and  foreign  credits 
to  Paris  to  take  advantage  of  the  reduced  prices  of  "the 
internationals."  M.  Say,  in  his  report,  attributed  to  these 
arbitrage  transactions  in  international  stocks  and  their  cou- 
pons much  of  the  facility  with  which  the  indemnity  was 
paid.  The  sales  of  Italian  five  per  cent,  securities  alone  on 
the  Paris  Bourse  from  July  i,  1871,  to  December  31,  1873, 
were  46,115,000  francs  ($9,000,000),  not  including  sales  by 
private  brokers.  The  proof  that  these  sales  were  largely  on 
foreign  account  was  furnished  by  the  decline  in  the  interest 
payments  made  at  Paris  on  Italian  securities  from  40,150,- 
ooo  francs  on  July  1,1871,  to  25,604,000  francs  on  January 


The  Bank  of  France  was  embarrassed  as  early  as  1860  by 
the  fluctuations  in  the  relative  value  of  gold  and  silver  and 
their  departure  from  the  ratio  of  fifteen  and  a  half  to  one 
fixed  by  the  French  coinage  law  of  1803.  Silver  had  be- 
come the  more  valuable  metal,  because  of  the  immense  addi- 
tion to  the  gold  stock  by  the  discoveries  in  California  and 
Australia.  The  value  of  silver,  in  other  words,  was  greater 
in  proportion  to  gold  than  the  price  paid  for  bullion  at  the 
mint.  It  was  obvious  that  if  the  bank  continued  the  policy 
of  redemption  of  its  notes  in  gold  or  silver  at  the  option  of 
the  holder,  silver  coin  would  always  be  preferred,  and  would 
be  withdrawn  for  speculative  purposes  as  long  as  it  could  be 
obtained,  because  it  could  be  sold  as  bullion  at  a  profit  above 
its  face  value  in  gold.  The  situation  became  so  serious  that 
the  bank  asserted  the  option  to  pay  only  in  gold  and  was 
obliged  to  borrow  that  metal  from  the  Bank  of  England  in 
order  to  be  well  supplied.  Gold  had  been  flowing  into 
France  since  the  opening  of  the  California  mines  and  silver 


1  Leroy-Beaulieu,  II.,  236.  M.  Leroy-Beaulieu  admits  that  sales  for 
report  are  included  in  the  first  item,  but  the  decline  in  interest  pay- 
ments at  Paris  seems  to  sustain  his  argument  that  Italian  securities 
left  France  in  order  that  their  proceeds  might  be  invested  in  the  in- 
demnity loan. 


BANKING  IN  FRANCE.  67 

flowing  out  in  an  uninterrupted  stream,1  but  the  Bank  of 
France  had  held  on  to  the  dearer  metal,  silver,  and  redeemed 
in  the  cheaper  until  its  gold  reserve  was  reduced  in  1860  to 
about  100,000,000  francs,  while  its  silver  stood  at  about  325,- 
000,000  francs.  About  ,£2, 000,000  in  gold  was  obtained  from 
the  Bank  of  England,  which  was  not  averse  to  exchanging 
the  less  valuable  metal  for  the  dearer,  even  though  the  latter 
was  not  a  money  metal  in  England. 

The  departure  of  the  market  ratio  of  gold  and  silver  from 
the  mint  ratio  by  the  depreciation  of  gold  was  the  occasion 
of  the  formation  of  the  Latin  Union.  Belgium,  Italy,  and 
Switzerland  had  already  adopted  the  French  decimal  system 
of  coinage  before  the  formation  of  the  Union,  and  the  coins 
of  each  country  circulated  freely  in  the  others.  The  proposi- 
tion for  a  conference  came  from  Belgium,  but  was  cordially 
accepted  by  the  French  government  and  the  meeting  called 
at  Paris.  The  most  pressing  problem  to  be  confronted  was 
the  disappearance  of  the  subsidiary  silver  coins  because  of 
the  premium  upon  silver.  Switzerland  had  already  reduced 
her  silver  coins,  except  the  five-franc  piece,  by  the  law  of 
January  31,  1860,  from  nine-tenths  fine  to  eight-tenths; 
Italy,  by  the  law  of  August  24,  1862,  had  lowered  to  0.835 
fine  the  franc  and  smaller  pieces  ;  and  France  had  adopted 
the  standard  of  0.835  for  her  pieces  of  20  and  50  centimes. 
The  change  of  all  but  the  five- franc  piece  was  recommended 
by  a  commission  appointed  by  the  French  government  in 
1 86 1,  but  the  Corps  L,egislatif  in  passing  the  law  of  May  25, 
1864,  refused  to  reduce  the  one-  and  two-franc  pieces.2  Bel- 
gium was  on  the  point  of  taking  legislative  action  when  the 
advantages  of  an  international  conference  suggested  them- 
selves. 

The  refusal  of  the  French  legislative  body  to  reduce  the 
fineness  of  the  larger  silver  pieces,  so  as  to  bring  their  bullion 

1  The  net  imports  of  gold  into  France  from  1848  to  1870  were  5,153,- 
000,000  francs  ($1,000,000,000)  and  only  one  year  (1861)  showed  net 
exports.  The  years  1852  to  1864  showed  uninterrupted  net  exports  of 
silver  amounting  to  1,726,000,000  francs  ($340,000,000). — Shaw,  184-86. 

*  Arnaune",  191. 


68  HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

value  down  to  their  face  value,  was  rapidly  driving  them  out 
of  circulation  and  silver  had  long  ceased  to  be  offered  in  any 
considerable  quantities  for  coinage  at  the  mints.1  The  con- 
ference decided  that  all  silver  coins  below  the  five-franc  piece 
should  be  reduced  to  0.835  fine,  that  their  coinage  should  be 
limited  in  each  country  to  six  francs  per  capita,  that  the  sub- 
sidiary silver  should  be  received  in  the  public  depositaries  of 
each  country  in  amounts  not  exceeding  one  hundred  francs 
($19.30)  and  should  be  a  legal  tender  in  the  country  where 
coined  in  amounts  of  not  more  than  fifty  francs  ($9.65).  The 
Belgian,  Swiss,  and  Italian  delegates  strongly  urged  the  adop- 
tion of  the  single  gold  standard,  but  the  proposition  was  re- 
sisted by  the  French  delegates  and  was  not  acted  upon.  The 
convention  putting  in  effect  the  decisions  reached  in  the  con- 
ference was  adopted  on  December  23,  1865,  and  Greece  soon 
after  became  a  party  to  it.  A  monetary  conference  was  held  at 
Paris  in  connection  with  the  international  exposition,  which 
recommended  the  adoption  of  the  gold  standard  by  the  coun- 
tries taking  part,  and  it  was  in  pursuance  of  this  action  that 
the  French  government  concluded  the  preliminary  conven- 
tion of  July  31,  1867,  with  Austria,  establishing  a  fixed  rela- 
tion between  the  franc  and  the  gold  florin.2 

The  formation  of  the  I,atin  Union,  so  generally  treated  to- 
day as  a  plan  to  maintain  bimetallism,  was,  in  the  language 
of  a  high  authority,  "  a  measure  of  defence  against  the  ac- 
tion of  the  bimetallic  system  in  those  countries  which  had 
adopted  the  monetary  system  of  France,  and  lay  exposed  to 
all  its  disastrous  fluctuations."  3  The  effect  of  the  action  of 
the  countries  forming  the  Union,  in  the  language  of  the 
French  monetary  commission  of  1867,  "  places  in  the  front 
rank  gold  money,  and  reduces  the  pieces  of  silver  of  two 
francs  and  less  to  the  r61e  of  token  money.  It  therefore 


1  The  total  coinage  of  silver  at  the  French  mint  in  1863  was  329,610 
francs  ($65,000),  while  the  gold  coinage  was  210,230,640  francs  ($41,- 
000,000).     The  largest  silver  coinage  since  1856  had  been  8,663,568 
francs  in  1858,  and  the  largest  gold  coinage  702,697,790  francs  in  1859. 

2  Vide  Ch.  viii.  and  ix. 

3  Shaw,  190 


BANKING  IN  FRANCE.  69 

definitely  determines  the  ascendency  of  the  gold  franc  and 
solves  practical  difficulties  arising  from  the  double  stand- 
ard." The  Latin  Union,  so  far  from  establishing  bimetal- A 
lism,  adopted  the  gold  franc  as  the  standard  because  gold 
was  then  the  money  of  general  circulation  within  the  coun- 
tries of  the  Union.  The  mints  continued  open  to  the  free 
coinage  of  both  metals,  but  silver  was  not  offered  on  private 
account  for  coinage  into  five-franc  pieces  at  the  legal  ratio, 
any  more  than  gold  would  be  offered  at  the  present  day  in  a 
country  where  silver  at  the  old  ratio  was  the  common  medium 
of  circulation. 

It  was  because  the  ratio  tilted  backwards  to  a  higher  bul- 
lion value  for  gold  and  a  declining  value  for  silver  that  the 
aspect  of  the  monetary  problem  was  reversed  and  that  the 
purpose  of  the  Latin  Union  has  come  to  be  misunderstood. 
The  members  of  the  union  from  the  outset,  however,  have 
done  no  more  than  seek  to  maintain  the  circulation  of  silver 
by  limiting  its  coinage.  Silver  first  dropped  below  par  in 
1867,  when  the  commercial  ratio  of  gold  to  silver  was  i  to 
15.57,  but  it  was  not  until  1873,  when  the  quotation  was 
i  to  1 5.92, 1  that  it  began  to  be  noticed  that  an  excessive  quan- 
tity of  silver  was  being  minted  and  that  gold  was  disappear- 
ing from  circulation.  The  problem  was  complicated  by  the 
fact  that  France,  Italy,  and  Greece  were  under  the  regime 
of  paper  money,  leaving  only  Belgium  and  Switzerland  in 
full  enjoyment  of  the  bimetallic  coinage  system.  The  latter 


1  The  statement  of  these  differences  in  the  terras  of  the  ratio  makes 
them  look  much  more  trifling  than  is  really  the  case.  Stated  in  terms 
of  percentage,  the  depreciation  of  silver  in  1867  was  a  little  less  than 
one-half  of  one  per  cent.  (0.45)  and  in  1873  was  2.7  per  cent,  of  the  par 
Talue.  The  depreciation  in  1872  was  0.97  per  cent.  It  is  interesting 
to  note  that  the  changes  prior  to  1873  took  place,  and  that  their  effect 
was  visible  in  the  bullion  offerings  at  the  mints,  before  the  adoption 
of  the  gold  standard  in  Germany  or  the  United  States  or  the  limitation 
of  coinage  by  the  Latin  Union.  The  depreciation  of  nearly  one  per 
cent,  in  1872  was  sufficient  to  afford  a  large  profit  on  bullion  operations, 
in  view  of  the  fact  that  the  usual  element  in  such  computations — 
the  time  consumed  in  earning  interest — did  not  need  to  be  considered. 


7O  HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

country,  with  a  keen  appreciation  of  actual  conditions, 
almost  entirely  suspended  silver  coinage  and  received  her 
circulation  from  the  other  countries  of  the  union.1  The 
presentation  of  gold  for  coinage  at  the  French  mints  ceased 
during  1872  and  1873,  and  the  silver  coinage  was  26,838,369 
francs  in  the  former  and  156, 270,160  francs  in  the  latter  year. 
The  mint  of  Belgium  was  besieged  by  the  owners  of  silver 
bullion  and  111,000,000  francs  in  five-franc  pieces  were 
coined  in  1873,  while  even  Italy,  though  on  a  paper  basis, 
coined  42,000,000  lires,  which  were  refused  acceptance  by 
the  Bank  of  France.3 

The  limitation  of  the  coinage  was  resorted  to  for  the  four 
years  ending  with  1877  as  the  only  means  of  averting  the 
single  silver  standard.  Conferences  were  held  annually  and 
the  maximum  coinage  of  five-franc  pieces  was  fixed  for  each 
country.  The  aggregate  of  these  allowances  for  the  four 
years  was  45,200,000  francs  for  Belgium,  216,000,000  francs 
for  France,  18,000,000  francs  for  Greece,  164,000,000  francs 
for  Italy,  and  28,800,000  francs  for  Switzerland.  Italy  was 
allowed  to  coin  29,000,000  francs  in  1878  and  1879,  on  condi- 
tion that  the  sum  should  be  retained  in  the  Bank  of  Italy  as 
a  metallic  reserve  against  the  circulating  paper  money. 
Silver  continued  to  fall  in  price  and  the  policy  of  limitation 
was  succeeded  in  1878  by  the  policy  of  absolute  suspension 
of  the  coinage  of  five-franc  pieces.  The  monetary  union 
was  renewed  from  1878  to  January  i,  1886,  and  was  ex- 
tended in  1885  to  January  i,  1891,  since  when  it  has 
been  prolonged  annually  by  mutual  agreement.  The  con- 
vention of  1885  not  only  bound  each  of  the  contracting 
parties  not  to  resume  the  coinage  of  five-franc  pieces  without 
the  consent  of  the  union,  but  provided  that  if  such  coinage 
should  be  resumed  the  coins  should  be  redeemable  by  the 
nation  coining  them  in  gold  on  demand,  and  that  if  such 


1  Her  entire  coinage  of  five-franc  pieces,  from  the  first  limitation 
to  the  final  suspension  of  silver  coinage,  was  only  7,978,000  francs 
($i, 500,000). — Haupt,  85-86. 

*  Arnaune,  197. 


BANKING  JN  FRANCE.  J\ 

redemption  should  be  refused  the  coins  might  be  refused  by 
the  public  depositaries  of  the  other  parties  to  the  union.1 

It  was  such  conditions  which  confronted  the  Bank  of 
France  when  it  prepared  to  resume  specie  payments  in  1877 
with  a  gold  reserve  of  1,202,400,000  francs  ($232,000,000)  and 
a  silver  reserve  of  860,900,000  francs  ($165,000,000).  The 
situation  was  exactly  the  same  as  in  1860,  except  that  the 
position  of  the  two  metals  was  reversed.  The  bank  found 
itself  well  stocked  with  the  more  valuable  metal,  but  re- 
strained from  using  it  for  redemption  purposes  because  of 
the  certainty  that  it  would  soon  be  drawn  away  and  sold  as 
bullion.  The  policy  was  adopted,  and  has  been  steadily 
adhered  to,  of  redeeming  in  gold  or  silver  at  the  discretion 
of  the  bank  and  charging  a  premium  for  gold.  It  is  impos- 
sible to  obtain  gold  at  the  bank  in  the  quantity  desired  for 
exportation  and  it  has  to  be  taken  from  the  domestic  circu- 
lation. This  means  of  protecting  its  gold  reserve  has  been 
treated  by  the  bank  in  some  measure  as  a  substitute  for  rais- 
ing the  rate  of  discount  in  a  monetary  pressure  and  while  it 
protects  the  gold  of  the  bank  it  has  none  of  the  advantages 
upon  the  money  market  which  follow  the  different  policy  of  the 
Bank  of  England .  The  bullion  shippers  were  shrewd  enough 
when  discount  was  low  and  gold  at  a  premium  in  1857,  *° 
draw  gold  by  discounting  accommodation  bills  at  the  bank 
rate  of  four  per  cent,  and  selling  the  gold  for  the  premium 
for  exportation.  The  bank  prevents  this  under  its  present 
practice  by  paying  for  discounted  paper  in  silver,  which  is 
not  exportable  for  monetary  purposes.  The  result, — "to 
defend  the  reserve  of  the  bank  to  the  detriment  of  the  reserve 
of  the  country,"  in  the  language  of  M.  Arnaune — "is  an 
error  which  may  have  melancholy  consequences."  2 

The  excessive  quantity  of  silver  in  the  reserve  of  the  bank 
has  contributed  in  a  measure  to  its  large  note  circulation. 
The  bank  has  tried  to  force  silver  five-franc  pieces  into  cir- 


1  For  the  arrangements  regarding  the  liquidation  in  gold  of  the 
excess  of  foreign  silver  coins  in  France,  see  Chapter  xi.,  under  the 
Bank  of  Belgium. 

•  La  Monnaie,  le  Credit,  etle  Change,  397. 


72  HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

culation,  but  they  have  drifted  as  steadily  back  upon  its 
hands  as  standard  silver  dollars,  in  spite  of  the  efforts  of 
Treasurer  Jordan,  drifted  back  into  the  Treasury  of  the 
United  States  in  1885  and  1886.  People  have  preferred  to 
take  notes  resting  upon  the  security  of  both  the  gold  and 
silver  in  the  bank  reserves.  The  bank,  in  the  language  of 
an  eminent  Scotch  financier,  has  had  to  ' '  relieve  the  public 
of  ,£50,000,000  of  silver,  which  was  coined,  and  was  in  ex- 
cess of  the  silver  required  for  the  purposes  of  the  people."1 
The  government  proposed  the  removal  of  the  limit  on  circu- 
lation in  1884  and  while  this  was  refused,  the  maximum  was 
carried  up  by  the  law  of  January  30,  1884,  from  3, 200, 000,000 
francs  to  3,500,000,000  francs.  The  actual  circulation  at 
this  time  was  3,162,000,000  francs,  but  it  continued  to  rise 
in  response  to  the  demand  of  the  public  for  notes.  The  ex- 
cess of  notes  in  circulation  over  gold  and  silver  was  1,210,- 
ooo  francs  in  1884  and  was  reduced  in  1893  to  695,000,000 
francs,  while  the  circulation  had  climbed  upwards  on  Jan- 
uary 12,  1893,  to  3,473,000,000  francs.  Another  extension 
of  the  legal  limit  was  demanded  for  the  accommodation  of 
commerce  and  it  was  carried  upward  by  the  law  of  January 
25,  1893,  to  4,000,000,000  francs.3 

The  fluctuations  in  the  gold  and  silver  holdings  of  the 
Bank  of  France  are  in  some  degree  an  epitome  of  its  history. 
Gold  was  scarcely  a  factor  during  the  years  before  the  dis- 
covery of  the  Californian  and  Australian  mines,  but  after 
1852  it  rapidly  expelled  silver  from  the  vaults  until  the  bank 
took  measures  to  reserve  what  was  then  the  more  valuable 
metal.  The  swing  of  the  ratio  backward  in  favor  of  gold  in 
1867  was  followed  by  accumulations  of  silver  which  have  not 
driven  out  the  gold  because  of  the  option  which  the  bank 
has  exercised  to  pay  in  either  metal.  The  figures  for  repre- 
sentative years,  in  francs,  are  as  follows  : 


1  Mr.  Charles  Gairdner,  manager  of  the  Union  Bank  of  Scotland, 
before  the  Indian  Currency  Committee.     Sen.  Misc.   Doc.  23,  53d 
Cong.,  ist  Sess.,  150. 

2  Arnaune",  326-27. 


BANKING  IN  FRANCE. 


YEAR. 

GO 

LD. 

SIL 

ITER. 

1811 

Maximum 
21,714,000 

Minimum 
l8,3OI,OOO 

Maximum 
105,231,000 

Minimum 
9I,228,OOO 

1820 

5I,8l7,OOO 

22,488,000 

167,372,000 

136,925,000 

1830 

1,700,000 

I7I,8oo,OOO 

IO2,5OO,OOO 

1840 

26,700,000 

IO,OOO,OOO 

235,000,000 

185,600,000 

1850 

29,2OO,OOO 

5,500,000 

339,100,000 

290,700,000 

1852 

86,800,000 

63,900,000 

447,000,000 

349,7OO,OOO 

1855 

I7I,OOO,OOO 

28,3OO,OOO 

92,400,000 

25,000,000 

1857 

95,900,000 

36,500,000 

35,400,000 

25,300,000 

1860 

238,300,000 

97,4OO,OOO 

325,100,000 

269,000,000 

1865 

39I,20O,OOO 

215,900,000 

142,800,000 

93,900,000 

1868 

877,100,000 

662,400,000 

477,300,000 

308,800,000 

1870 

739,300,000 

433,700,000 

579,600,000 

70,900,000 

1875 

I,I76,IOO,OOO 

,OO4,3OO,OOO 

508,700,000 

309,200,000 

1877 

1,556,500,000 

,204,100,000 

866,700,000 

637,IOO,OOO 

1880 

826,900,000 

536,400,000 

,282,500,000 

,212,000,000 

1885 

I,I75,8oo,OOO 

995,300,000 

,106,100,000 

,024,400,000 

1890 

I,32O,9OO,OOO 

,114,200,000 

,276,900,000 

,239,IOO,OOO 

1892 

1,708,300,000 

,336,2OO,OOO 

,299,000,000 

,248,5OO,OOO 

1893 

I,72O,9OO,OOO 

,537,2OO,OOO 

,285,500,000 

,247,900,000 

1894 

2,061,500,000 

,695,500,000 

,283,100,000 

,237,4OO,OOO 

The  most  important  functions  of  the  Bank  of  France  relate 
to  the  monetary  circulation.  The  volume  of  commercial  dis- 
counts has,  however,  grown  to  considerable  proportions  of 
late  years  and  has  included  the  rediscounting  of  very  mi- 
nute pieces  of  commercial  paper  presented  by  the  discount 
banks  of  Paris.  The  number  of  pieces  discounted  by  the 
central  bank  in  1894  was  5,805,774,  and  of  these  2,188,957 
pieces  were  for  100  francs  ($20)  or  less,  and  more  than  half 
of  these  were  below  50  francs.  The  number  of  pieces  of  100 
francs  or  less  in  1881  was  1,160,495,  and  in  1885  1,590,839. 
The  bank  has  suffered  in  the  volume  of  its  discounts  from 
the  competition  of  banking  companies  of  more  compact  or- 
ganization and  with  fewer  public  responsibilities,  which  have 
kept  their  discount  rates  more  closely  in  harmony  with  those 
of  the  money  market.  The  rate  of  discount  at  the  bank1 

1  M.  Neymarck  suggests  that  the  bank  should,  upon  the  renewal  of 
its  charter,  be  authorized  to  lend  at  less  than  the  official  rate  on  the 
best  paper,  as  is  done  by  the  Bank  of  England.  By  adhering  uni- 
formly to  the  official  rate,  he  argues,  the  bank  drives  the  first-class 
paper  (papier  de  choix]  to  other  lenders  and  gets  only  that  of  inferior 
quality. — Du  Renouvellement  du  Privilege,  10-11. 


74  HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

was  for  many  3^ears  kept  at  four  per  cent.,  in  defiance  of  the 
rates  in  other  countries  and  outside  the  bank,  and  even  at 
present  is  less  often  changed  than  in  other  large  banks. 
The  rate  fixed  on  May  19,  1892, — two  and  a  half  per  cent, 
for  commercial  discounts  and  three  and  a  half  per  cent, 
for  advances  on  securities — remained  for  nearly  three  years 
unchanged,  and  was  only  reduced  to  two  and  three  per  cent, 
on  March  14,  1895.  This  was  still  the  rate  at  the  beginning 
of  1896. 

The  fact  that  the  bank's  most  important  functions  relate 
to  the  circulation  may  be  deduced  from  the  figures  of  its 
transactions.  The  circulation  exceeds  by  more  than  three 
times  the  discounts  and  advances,  and  the  metallic  reserve  is 
many  times  the  entire  liability  on  account  of  deposits.  The 
circulation  on  January  2,  1896,  was  3,647,097,410  francs. 
The  commercial  discounts  at  Paris  were  346,394,931  francs 
and  at  the  branches  503,356,005  francs.  The  advances  on 
securities  at  Paris  were  182,603,486  francs  and  at  the  branches 
201,936,317  francs.  Discounts  have  fallen  off  somewhat 
during  the  past  two  years,  because  the  bank  rate  has  been 
higher  than  that  of  London  and  of  other  money  lenders, 
but  the  commercial  discounts  at  the  central  bank  and 
branches  were  only  681,000,000  francs  on  January  4,  1894, 
and  reached  the  temporary  elevation  of  983,000,000  francs 
on  April  26th,  only  because  of  the  negotiation  of  an  important 
loan  by  the  City  of  Paris.1  If  discounts  are  relatively  small, 
deposits  are  still  smaller,  and  if  they  are  of  minor  import- 
ance at  Paris,  they  are  insignificant  at  the  branches.  The 
deposits  at  Paris  on  January  2,  1896,  were  562,259,304 
francs  ($107,000,000)  and  at  all  the  branches  90,041,157 
francs  ($17,000,000).  The  discounts  given  in  the  following 
table  of  the  principal  items  of  the  bank's  accounts,  from  the 
official  reports  to  the  government,  represent  the  aggregate 
of  the  bills  discounted  during  the  year  rather  than  the 
amount  outstanding  on  any  given  date  : 


1  Raffalovich,  Le  Marche  Financier  en  iSw-gs,  23. 


BANKING  IN  FRANCE. 


75 


YEAR. 

MEAN 
CIRCULATION. 

MEAN  METALLIC 
RESERVE. 

TOTAL 
DISCOUNTS. 

MEAN   DISCOUNT 
RATE. 

(In  millions  of  francs) 

1845 

268.8 

271.2 

1,399-3 

4.00 

1848 

347-8 

176.2 

1,537-4 

4.OO 

1850 

495-5 

457-8 

1,171.0 

4.OO 

1855 

644.4 

340.5 

3,765.2 

4-44 

1860 

736.4 

513.5 

9,964.7 

3.63 

1865 

843-8 

439.6 

6,030.2 

3.72 

1870 

1,566.4 

1,130-7 

6,627.3 

3-99 

i875 

2,464.9 

i,54i.i 

6,826.7 

4.00 

1880 

2,311-4 

1,974-4 

8,696.8 

2.81 

1885 

2,891.6 

2,150.7 

9,250.1 

3-00 

1890 

3,076.6 

2,476.7 

9,549-7 

3.00 

1892 

3,186.3 

2,785.3 

8,415.7 

2.50 

1893 

3,423.0 

2,895.3 

8,922.2 

2.50 

1894 

3,495-0 

3,127.7 

8,725.6 

2.50 

1895  ' 

3.484.9 

3,202.9 

8,621.9 

2.00 

The  Bank  of  France  enjoys  the  advantage  of  an  owner- 
ship and  credit  independent  of  that  of  the  government,  in 
spite  of  the  close  official  supervision  which  is  exercised  over 
it.  This  financial  independence  proved  as  useful  to  the 
country  midst  national  disasters  and  changes  of  government 
in  1870-71  as  dependence  upon  the  government  proved 
dangerous  during  the  similar  changes  of  1814-15.  The  bank 
was  able  to  assist  the  government  by  advances  when  its  own 
arms  were  paralyzed.3  None  of  the  182,500,000  francs  of 
the  bank  capital  are  owned  by  the  State,  but  the  government 
since  1806  has  had  a  share  in  the  management  through  the 
appointment  of  the  governor  and  two  deputy  governors, 
removable  at  the  will  of  the  Minister  of  Finance.  The  bank 
receives  the  public  monies  on  deposit  and  performs  other 
public  services  free  of  charge,  but  does  not  act  as  an  agent 
of  the  State  to  the  same  extent  as  many  other  European 
banks.  The  Treasury  is  entitled  to  an  advance  of  140,000,- 
ooo  francs  ($28,000,000)  and  receives  the  proceeds  of  a  stamp 
duty  on  the  notes  and  a  tax  of  four  per  cent,  on  dividends. 
The  proceeds  of  these  taxes  in  1894  were  about  2,500,000 

1  Actual  condition,  December  26th. 

2  Noel,  I.,  240.     M.  Thiers  summed  up  one  of  the  lessons  of  sound 
banking  in  a  sentence  :     "The  bank  saved  us  because  it  was  not  a 
bank  of  state." 


76  HISTORY  OF  MODERN  BANKS   OF  ISSUE. 

francs  ($500,0x30).  There  is  no  division  of  profits  with  the 
government,  but  this  has  been  repeatedly  proposed  in  connec- 
tion with  re-charter.  The  requirement  that  the  bank  shall 
maintain  a  branch  in  each  department  has  now  been  com- 
plied with,  and  ninety-four  branches,  thirty-eight  auxiliary 
bureaus,  and  116  other  banking  offices  are  in  operation. 
Each  branch  is  under  the  charge  of  a  director  appointed  by 
the  government  upon  the  nomination  of  the  governor  of  the 
bank. 

The  governing  board  of  the  bank  is  a  general  council, 
which  consists  of  fifteen  regents  and  three  inspectors  or 
auditors  (censeurs).  The  members  are  elected  at  a  general 
meeting  of  the  stockholders,  but  three  of  the  regents  must 
be  selected  from  the  treasury  disbursing  agents,  and  three 
inspectors  and  five  regents  must  be  chosen  from  among  the 
business  portion  of  the  shareholders.1  The  only  share- 
holders entitled  to  participate  in  the  annual  meetings  in 
January  are  the  two  hundred  who  hold  the  largest  number 
of  shares,  and  at  the  present  value  of  the  shares  no  share- 
holder worth  much  less  than  500,000  francs  (§100,000)  is  able 
to  participate. 2  A  full  statement  of  operations  is  furnished  by 
the  bank  to  the  government  every  six  months  and  a  balance 
sheet  is  published  in  the  official  journal  every  Friday.  The 
expenses  of  the  central  bank  for  1894  were  7,464,600  francs 
and  of  the  branches  6,521,100  francs.  Transportation  and 
other  general  expenses  of  2,447,822  francs  raised  the  total 
to  16,433,522  francs  (§3,200,000).  Fifteen  branches  showed 
an  excess  of  cost  over  net  earnings  in  1894  amounting  to 
156,831  francs  ($31,000).  The  number  of  employees  of  the 


1  Lois  et  Statuts,  Art.  9,  loi  du  22  Avril,  1806. 

2  Neymarck,    15.     This  provision   has  been  the  subject  of  much 
criticism  in  connection  with  the  renewal  of  the  charter  and  it  has  been 
pointed  out  that  the  bank  is  the  only  one  of  the  great  European 
institutions  where  the  number  entitled  to  vote  in  the  general  meet- 
ings of  the  shareholders  is  thus  definitely  limited.     A  minimum  num- 
ber of  shares  is  the  usual  qualification,  being  only  one  in  the  Imperial 
Bank  of  Germany,  five  in  Holland  and  Servia,  ten  in  Belgium,  fifteen 
in  Italy,  twenty  in  Austria-Hungary,  and  fifty  in  Spain. — Noel,  I.,  222. 


BANKING  IN  FRANCE.  77 


central  bank  in  1894  was  IO74  an(^  °f  the  branches  1258. 
The  dividends  distributed  in  1894  were  117.7  francs  per 
share,  including  the  impost  of  4.7  francs.  The  highest 
dividend  paid  was  350  francs  in  1873.  This  was  35  percent. 
of  the  par  value  of  the  shares,  but  only  8.09  per  cent,  on  the 
market  value,  which  was  about  4370  francs.  The  value  of 
the  shares  on  December  31,  1894,  was  3600  francs. 

The  Bank  of  France  may  be  confronted  in  the  immediate 
future  with  a  struggle  for  existence.  The  renewal  of  the 
charter  was  proposed  in  1891,  but  the  opposition  was  so 
strong  in  the  Chambers  that  the  bill  for  the  purpose  was 
withdrawn  by  the  ministry  for  fear  of  defeat.  Two  potent 
influences  are  arrayed  against  the  renewal  of  the  monopoly 
of  note  issues  by  the  bank  under  the  terms  of  the  existing 
charter.  On  one  side  stand  the  classical  political  economists, 
who  believe  in  the  theory  of  free  banking  and  point  to  the 
success  of  the  departmental  banks  before  1848  and  the  develop- 
ment of  the  Scotch  and  American  systems,  in  support  of  the 
policy  of  diffusing  agencies  of  credit  and  of  note  issue 
throughout  the  country.  On  the  other  side  stand  the  social- 
ists, who  believe  that  the  bank  should  be  turned  into  a 
great  machine  for  scattering  paper  riches  among  the  people 
in  the  form  of  pensions  and  insurance,  in  payment  for  public 
works,  and  in  the  purchase  of  the  instruments  of  transporta- 
tion and  communication  by  the  State.  The  close  of  the  year 
1897  will  witness  the  expiration  of  the  charter,  unless  legisla- 
tion is  enacted  in  the  meantime  to  extend  it.  It  is  possible 
that  the  government  will  exercise  the  executive  power  of 
prolonging  the  charter  for  a  year  or  two,  as  has  already  been 
done  in  the  case  of  some  of  the  colonial  banks  whose  char- 
ters expired  in  1894. 


CHAPTER  IV. 

FIRST  CENTURY  OF  THE   BANK   OF    ENGLAND. 

The  Economic  and  Financial  Conditions  Out  of  Which  the  Bank 
Grew  —  Early  Difficulties  and  the  First  Suspension  of  Specie  Pay- 
ments —  The  Loans  of  the  Napoleonic  Wars  and  the  Restriction 
of  1797  —  Pitt's  Enormous  Drafts  upon  the  Bank. 


Bank  of  England,  like  many  of  the  Continental 
banks,  had  its  origin  in  the  needs  of  the  State.  The 
institution  which  resulted  has  been  several  times  the 
victim  of  the  monetary  necessities  of  the  government,  but 
has  not  been  dragged  quite  so  persistently  as  the  banks 
of  Italy,  Austria,  and  Russia  through  the  mire  of  depreciated 
money  and  forced  legal  tender.  The  Bank  of  England  has 
come  to  enjoy,  by  a  series  of  changes  in  the  law,  the  substan- 
tial monopoly  of  note  issue  in  England  and  Wales,  and  has 
proved  one  of  the  strongest  banking  institutions  of  the  world. 
The  note  circulation,  since  the  Act  of  1844,  is  based  wholly 
upon  securities  and  deposits  of  coin  and  bullion.  The  rigidity 
of  the  English  system,  by  which  expansion  is  prevented  to 
meet  changing  conditions  of  business,  has  received  the  con- 
demnation of  most  students  of  political  economy,  but  this  has 
not  kept  it  from  becoming  to  some  extent  the  model  of 
national  banks  of  later  foundation  on  the  Continent  of 
Europe.  The  defects  of  the  English  system  of  note  issues 
are  those  which  are  most  apparent  in  a  country  where  deposit 
banking  is  in  its  infancy.  They  are  less  obvious  and  oppres- 
sive in  England  than  they  would  otherwise  be  because  of 
her  small  area,  the  wide  use  of  credit  instruments  and  the 
closely-knit  commercial  relations  of  her  people. 

73 


FIRST  CENTURY  OF   THE  BANK  OF  ENGLAND.      79 

The  creation  of  the  Bank  of  England  is  involved  with 
both  the  political  and  fiscal  history  of  the  close  of  the  seven- 
teenth century.  England  was  behind  Italy  and  Holland  in 
the  development  of  the  mechanism  of  modern  commerce,  and 
the  proposition  to  establish  a  banking  system  was  sharply 
resisted  by  Gerard  Malynes,  who  published  in  1601  a 
Treatise  of  the  Canker  of  England  Js  Commonwealth.  Malynes 
described  the  Continental  method  of  banking  with  a  fairness 
and  precision  which  enable  its  leading  features  to  be  readily 
understood,  in  spite  of  his  opinion  that  payments  by  the 
banks  by  transfers  upon  their  books  were  '  *  almost  or  rather 
altogether  imaginative  or  figurative."  '  English  merchants 
deposited  their  cash  for  a  time  in  London  Tower,  but  .£120,- 
ooo  was  seized  by  Charles  I.,  in  1640,  and  only  repaid  after 
violent  protests  and  long  delay.2  The  goldsmiths  then  be- 
came the  bankers  for  the  community  and  paid  interest  for 
the  money  left  in  their  custody.  There  was  much  opposition1 
to  the  new  system  at  first  and,  strange  to  say,  one  of  the, 
last  to  adhere  to  the  old  method  of  keeping  his  cash  in  a 
strong  box  at  home  was  Sir  Dudley  North,  one  of  the  most 
progressive  thinkers  on  political  economy  of  his  time.  As 
Macaulay  graphically  recounts  North's  experience,  "  He 
found  that  he  could  not  go  on  Change  without  being  fol- 
lowed around  the  piazza  by  goldsmiths,  who,  with  low  bows, 
begged  to  have  the  honor  of  serving  him.  He  lost  his 
temper  when  his  friends  asked  where  he  kept  his  cash. 
'Where  should  I  keep  it,'  he  asked,  'but  in  my  own 
house?'  "  3 

While  commerce  was  coming  to  feel  more  and  more  the 
need  of  a  banking  institution,  the  government  was  also  feel- 
ing the  necessity  of 'some  method  of  raising  money  beyond 
the  precarious  plan  of  sending  agents  to  individual  mer- 
chants to  see  what  they  would  lend.  The  historic  legend 
that  King  James  I.  attempted  out  of  a  spirit  of  pure  wanton- 
ness to  levy  excessive  and  unusual  taxes  upon  the  people  of 

1  Cunningham,  II.,  98. 

2  MacLeod,  Theory  and  Practice  of  Banking,  I.,  435. 

3  History  of  England,  Chap.  xx. 


80  HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

England  is  not  fully  borne  out  by  the  facts.  The  method 
of  taxation  which  he  sought  to  introduce  was  simply  a  phase 
of  the  transition  from  feudal  to  modern  methods  of  carrying 
on  public  affairs.  As  a  careful  student  of  the  economic  his- 
tory of  Hngland  puts  it  : 

According  to  ancient  usage  the  King  had  been  able  to  live  of  his 
own,  and  had  recourse  to  Parliament  in  emergencies.  The  chief 
problem  of  the  seventeenth  century  was  to  find  a  source  of  revenue 
which  would  supply  a  regular  income,  that  might  adequately  corre- 
spond to  the  increased  responsibilities  of  government  in  these  more 
modern  times.  The  first  attempt  to  do  this  was  in  the  Great  Con- 
tract, proposed  to  the  Parliament  in  1610  ;  by  this  James  proposed  to 
relinquish  all  the  occasional  payments  from  feudal  tenures,  in  return 
for  a  regular  income  of  ,£"200,000  to  be  derived  from  parliamentary 
supplies. 

As  this  bargain  broke  down,  James  was  a  considerable  sufferer ; 
Charles  I.,  to  whom  Tunnage  and  Poundage  were  not  voted  for  life, 
was  left  in  a  position  of  direct  dependence  on  parliamentary  grants, 
and  he  did  not  conceal  his  resentment.  During  both  of  these  reigns 
every  effort  was  made  to  secure  supplies  from  extra-parliamentary 
sources  ;  while  the  Commons,  who  were  eagerly  anxious  to  assert 
their  position  and  exercise  a  real  control  over  the  foreign  as  well  as 
the  domestic  policy  of  the  realm,  were  always  on  the  alert  to  thwart 
these  attempts.  l 

The  parliamentary  party  succeeded  in  organizing  a  system 
of  taxation  by  means  of  customs  duties,  monthly  levies  upon 
real  estate  and  excises  on  internal  trade,  which  continued  in 
full  force  after  the  restoration  of  the  Stuarts.  These  taxes 
laid  the  foundation  of  the  modern  method  of  defraying  the 
expenses  of  government,  but  they  were  inadequate  for  many 
extra  expenses  and  for  carrying  on  the  wars  in  which 
Charles  II.  and  William  III.  found  themselves  involved. 
Charles  II.  turned  for  assistance  to  the  goldsmiths.  But  his 
rapacity  soon  outran  his  borrowing  capacity,  and  he  gave  a 
violent  shock  to  credit  by  a  proclamation  of  January  2,  1672, 
refusing  payment  out  of  the  Exchequer  of  money  advanced 
and  sequestrating  ,£1,328,526  to  his  own  use.  The  money, 
although  lent  by  the  goldsmiths  to  the  King,  was  the  prop- 

1  Cunningham,  II.,  215. 


FIRST  CENTURY  OF   THE  BANK  OF  ENGLAND.      8 1 

erty  of  some  10,000  depositors  and  its  loss  spread  ruin  and 
suffering  throughout  London.  A  long  course  of  litigation 
ensued,  which  finally  ended  in  the  reign  of  William  by  the 
consolidation  of  the^indebtedness  with  other  portions  of  the 
permanent  national  debt.1  This  conduct  on  the  part  of  the 
Stuart  King  made  the  people  and  the  bankers  cautious 
about  loaning  to  the  government,  and  William  III.  was 
driven  to  desperate  expedients  to  obtain  revenue  to  carry 
on  the  war  with  France.  A  poll  tax  was  imposed,  stamp 
duties  were  levied  which  have  never  been  entirely  repealed, 
and  enormous  prizes,  in  the  form  of  annuities  on  the  ton- 
tine plan,  were  offered  to  those  who  would  lend  to  the  State. 

A  plan  was  presented  to  the  Committee  of  the  House  of 
Commons,  while  they  were  considering  the  claims  of  the 
goldsmiths  in  the  autumn  of  1691,  which  contained  the 
germs  of  the  organization  of  the  Bank  of  England.  William 
Paterson,  himself  an  obscure  Scotchman,  but  supported  by 
several  wealthy  London  merchants,  offered  to  advance 
;£i, 000,000  to  the  government  on  condition  of  receiving 
,£65,000  a  year  as  interest  and  the  costs  of  management  and 
authority  to  issue  bills  which  should  be  legal  tender.  The 
government  refused  to  give  forced  currency  to  the  bills  and 
the  matter  fell  through  until  1694.  Montague,  the  ingenious 
and  enterprising  minister  of  William,  then  sent  for  Paterson 
and  requested  him  to  organize  a  plan.  The  new  project 
contemplated  a  loan  of  ,£2,000,000  to  the  government  at 
seven  per  cent.,  but  the  ministry,  wrho  were  accustomed  to 
discounts  and  commissions  of  forty  per  cent,  on  short  loans, 
could  not  be  made  to  believe  that  a  loan  with  no  fixed  date 
of  maturity  could  be  floated  at  such  a  low  rate.  The  gov- 
ernment turned  to  other  plans,  but  Paterson  persevered  and 
presently  obtained  the  help  of  Mr.  Michael  Godfrey,  who 
carried  the  scheme  to  a  successful  conclusion.  It  wras  put 
in  definite  shape  by  Montague  and  was  saddled  upon  the 
Ways  and  Means  bill  (Statutes  1694,  cn-  2°)>  in  a  form 
which  would  be  characterized  in  modern  legislation  as 
"a  rider." 

1  MacLeod,  Theory  and  Practice  of  Banking,  I.,  441-44. 

6 


82  HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

"  The  Governor  and  Company  of  the  Bank  of  England  " 
was  the  official  designation  of  the  new  bank,  but  it  was 
called  by  its  enemies  the  Tonnage  Bank,  because  the  bill 
levied  certain  tonnage  dues  as  well  as  customs  and  other 
taxes.  The  necessity  of  money  was  so  great  that  the  bill 
passed  without  a  division  in  the  Commons,  and  in  a  very 
thin  house.  There  was  some  opposition  in  the  House  of 
Ivords,  and  much  criticism  of  the  action  of  the  Commons  in 
attaching  the  provisions  for  the  bank  to  a  tax  bill.  It  was 
already  May,  according  to  the  new  style,  when  the  final 
struggle  occurred,  and  the  debate  of  the  last  day  continued 
from  nine  in  the  morning  till  six  in  the  evening.  It  was 
proposed  to  strike  out  all  the  clauses  relating  to  the  bank, 
but  its  defenders  suggested  that  this  would  be  to  invite  a  con- 
test with  the  Commons  over  the  old  political  issue,  whether 
the  I,ords  had  the  right  to  amend  a  money  bill.  This 
argument  prevailed,  the  amendment  was  rejected,  thirty- 
one  votes  in  its  favor  to  forty-three  in  the  negative,  and  a 
few  hours  later  the  bill '  received  the  royal  assent  and  Parlia- 
ment was  prorogued. 

The  new  bank  was  to  be  organized  upon  the  loan  by  the 
stockholders  of  ,£1,200,000  ($6,000,000)  a  to  the  government, 
and  was  authorized  to  issue  notes,  to  deal  in  bullion  and 
commercial  bills  and  to  make  advances  on  merchandise.  Sub- 
scriptions were  opened  on  Thursday,  June  2ist,  in  the  Mer- 
cer's Chapel,  and  one-quarter  of  the  capital  was  subscribed 
the  first  day.  Half  was  subscribed  within  three  days,  and 
by  Monday  noon,  July  2d,  the  entire  subscription  was  com- 
pleted. Among  the  subscribers  were  Sir  John  Houblon,  the 
first  Governor,  who  was  descended  from  a  Flemish  refugee  ; 

1  The  date  was  April  24,  1794,  old  style  ;  May  4,  new  style.     The 
dates  here  given  are  from  the  contemporary  records  and  are  old  style. 

2  The  value  of  the  English  pound  sterling  is  so  generally  known 
that  I  have  not  thought  it  necessary  in  this  and  the  following  chapter 
to  give  the  equivalents  in  United  States  money  for  the  sums  named. 
The  value  of  the  pound  sterling  as  reported  by  the  Director  of  the 
Mint  of  the  United  States  is  $ 4. 8665,  but  for  the  purpose  of  computing 
round  figures  is  usually  taken  at  $5.00. 


FIRST  CENTURY  OF   THE  BANK  OF  ENGLAND.      83 

Michael  Godfrey,  one  of  the  most  active  organizers  of  the 
bank  and  the  first  Deputy  Governor  ;  Queen  Mary  ;  the 
Duke  of  Leeds,  the  Duke  of  Devonshire,  the  Earl  of  Port- 
land, the  Countess  of  Carlisle,  Lord  Godolphin,  Lady  Ann 
Mason,  Sir  Stephen  Fox,  and  Sir  John  Trenchard.  The 
new  bank  began  the  discharge  of  its  pledges  to  the  govern- 
ment by  paying  into  the  Exchequer  ;£  112,000  in  bank-bills, 
sealed  with  the  seal  of  their  corporation,  which  bore  the 
figure  of  Britannia  sitting  on  a  bank  of  money.1  The  busi- 
ness of  the  bank  was  described  by  Godfrey,  who  wrote  a 
tract  in  its  support,  as  follows  : 

They  lend  money  on  mortgages  and  real  securities  at  five  per  cent, 
per  annum.  If  the  titles  of  land  were  made  more  secure,  money 
-would  be  lent  on  land  at  four  per  cent,  per  annum,  and  in  time  of 
peace  at  three  per  cent.  Foreign  bills  of  exchange  are  discounted 
at  four  and  a-half  per  cent.  ;  inland  bills  and  notes  for  debts  at  six 
per  cent.  They  who  keep  their  cash  in  the  bank  have  the  first  of 
these  discounted  at  three  per  cent.,  and  the  other  at  four  and  a-half. 
Money  is  lent  on  pawns  of  such  commodities-  as  are  not  perishable  at 
five  per  cent,  and  on  the  Fund  of  the  City  of  London  Orphans  at  five 
per  cent.2 

The  stock  of  the  bank  was  at  par  on  December  13,  1695, 
little  more  than  a  year  after  it  began  actual  operation,  but 
within  the  next  two  years  it  had  to  deal  with  a  combination 
of  difficulties  which  caused  the  suspension  of  specie  pay- 
ments, and  required  all  the  courage  and  ability  of  the 
directors  to  surmount.  The  bank  was  essentially  a  Whig 
institution  and  a  representative  of  the  commercial  interests 
of  London  ;  and  it  encountered  the  same  sort  of  jealous 
hostility  from  the  landed  interest  which  has  prevailed  in 
more  recent  times  against  the  moneyed  interests  of  ' '  Wall 
Street  "  and  "  Lombard  Street."  The  fate  of  the  bank  was 
so  closely  bound  up  with  that  of  the  Revolutionary  govern- 
ment that  it  was  compelled  to  lend  its  support  on  all  occa- 
sions of  emergency,  or  run  the  risk  of  seeing  the  entire  debt 
due  by  the  government  repudiated  by  the  restoration  of  the 

1  Rogers,  The  First  Nine  Years  of  the  Bank  of  England,  3. 

2  Rogers,  20. 


84  HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

Stuarts.  The  Bank,  in  the  forcible  language  of  Macaulay, 
"  Was  Whig  not  accidentally,  but  necessarily.  It  must  have 
instantly  stopped  payment  if  it  had  ceased  to  receive  the 
interest  on  the  sum  which  it  had  advanced  to  the  govern- 
ment ;  and  of  that  interest  James  would  not  have  paid  one 
farthing."  Mr.  Bagehot  declares  that  without  the  aid  of  the 
bank  : 

Our  national  debt  could  not  have  been  borrowed  ;  and  if  we  had 
not  been  able  to  raise  that  money  we  should  have  been  conquered  by 
France  and  compelled  to 'take  back  James  II.  And  for  many  years 
afterwards,  the  existence  of  that  debt  was  a  main  reason  why  the 
industrial  classes  never  would  think  of  recalling  the  Pretender  or 
of  upsetting  the  Revolution  settlement :  the  "  fundholder"  is  always 
considered  in  the  books  of  that  time  as  opposed  to  his  "  legitimate  " 
sovereign.1 

The  political  enemies  of  the  bank  were  supported  by  the 
goldsmiths  and  other  financial  men  whose  monopoly  of 
money  lending  was  assailed  by  the  new  institution.  The 
managers  of  the  bank  enjoyed  from  the  outset  three  privi- 
leges which  gave  them  an  immense  superiority  over  all 
competitors  and  enabled  them  to  reduce  the  charges  for  bank- 
ing. They  received  the  government  balances  ;  they  enjoyed 
alone  the  privilege  of  limited  liability,  by  which  the  share- 
holders were  liable  for  the  debts  of  the  bank  only  to  the 
amount  of  their  investment  and  not  for  its  entire  liability  ; 
and  they  were  able  to  loan  money  in  excess  of  their  deposits 
by  reason  of  the  circulating  notes  they  were  allowed  to  issue 
against  the  government  debt.  The  goldsmiths  were  able  to 
do  only  the  business  of  deposit  banking,  and  were  supposed 
to  lend  only  coin,  or  credit  for  which  they  held  coin  in  their 
vaults.2  The  goldsmiths,  therefore,  undoubtedly  felt  justi- 
fied by  reasons  of  self-preservation  in  lending  their  support 
to  any  plan  which  would  break  down  their  powerful  rival. 
Such  a  plan  was  presented  in  the  scheme  of  a  Land  Bank 
which  was  brought  before  Parliament  by  Hugh  Chamberlain 
in  1695. 

1  Lombard  Street,  Works,  V.,  64. 

2  Cunningham,  II.,  396. 


FIRST  CENTURY  OF   THE  BANK  OF  ENGLAND.      8$ 

Chamberlain's  scheme  was  to  issue  notes  upon  landed 
property  to  one  hundred  times  the  annual  rental,  lend  the 
notes  to  the  owner  of  the  land,  and  in  some  unexplained 
way  furnish  money  to  the  government  at  the  same  time. 
The  absolute  absurdity  of  calculating  the  money  value  of  a 
piece  of  real  estate  at  one  hundred  times  the  rental,  when 
the  fee  simple  was  worth  only  twenty  times  the  rental,  or 
one-fifth  as  much,  was  demonstrated  over  and  over  again, 
but  the  opponents  of  the  Land  Bank  were  answered  that 
they  were  "  usurers,"  and  the  enemies  of  the  Bank  of  Eng- 
land were  ready  to  catch  at  any  scheme  which  promised  to 
promote  their  projects.  Notwithstanding  its  folly  the  scheme 
was  authorized  by  law  and  received  the  royal  assent  on  April 
27,  1^96  (7  and  8  William  III.,  c.  31).  The  Land  Bank  pro- 
posed to  advance  to  the  government  ,£2,564,000,  on  which 
interest  was  to  be  paid  at  the  rate  of  seven  per  cent,  annu- 
ally, secured  by  a  special  tax  on  salt.  The  King  was  au- 
thorized to  appoint  a  body  of  commissioners  to  receive 
subscriptions,  half  of  which  were  required  to  be  subscribed 
before  August  i,  1696,  and  the  whole  before  January  i,  1697. 
Subscriptions  did  not  materialize,  however,  with  such  rapidity 
as  expressions  of  sympathy  for  the  enterprise.  The  Lords 
of  the  Treasury  subscribed  ^5000  on  behalf  of  the  King, 
but  the  other  subscriptions  never  exceeded  ^2100,  and  it  is 
recorded  about  three  years  later  that  Dr.  Chamberlain,  "  sole 
contriver  and  manager  of  the  Land  Bank,  is  retired  to 
Holland,  on  suspicion  of  debt."  ' 

The  immediate  effect  of  the  new  legislation  was  to  depress 
the  price  of  bank  shares,  which  fell  from  107  on  January  3ist, 
to  83  on  February  I4th.2  Capital  was  not  so  abundant  then 
as  now  and  the  mere  offer  of  a  new  public  stock  was  sufficient 
to  divert  investment  from  the  old  and  depress  its  value.  It 
was  argued  even  by  the  friends  of  the  bank  that  it  must  be 
the  sole  institution  of  its  kind,  like  the  banks  of  Venice, 
Amsterdam,  and  Hamburg,  in  order  to  retain  strength  and 
usefulness.  The  experience  that  the  stocks  of  an  existing 

1  Rogers,  56. 

2  Rogers,  50. 


86  HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

company  declined  under  the  influence  of  competition  was 
illustrated  in  a  striking  manner  by  the  history  of  the  East 
India  Company,  whose  stock  stood  at  158  in  the  beginning 
of  1692,  but  sank  to  38  after  Montague  brought  forward  his 
plan  for  the  new  or  English  East  India  Company.  The 
close  calculations  which  are  now  made  regarding  the  earn- 
ing capacity  and  value  of  stocks  were  little  understood  at 
that  time  and  the  unreasonable  declines  as  well  as  extrava- 
gant advances  which  occurred  are  illustrated  a  little  later  by 
the  history  of  the  Mississippi  scheme  in  France  and  the 
South  Sea  Bubble. 

The  bank  had  real  financial  difficulties  to  cope  with  as 
well  as  thpse  arising  from  political  distrust  and  competition. 
The  recoinage  which  was  ordered  by  the  Act  of  7  William 
III.,  ch.  i,  to  take  full  effect  on  February  i,  1697,  found 
the  bank  with  a  large  quantity  of  clipped  coin  on  hand  for 
which  they  were  bound  to  pay  in  new  pieces  of  full  weight. 
The  new  coinage  was  progressing  too  slowly  to  meet  de- 
mands, the  smallest  denomination  of  bank-notes  was  ^20, 
and  the  result  was  a  run  upon  the  bank  for  cash  during  the 
week  beginning  May  4,  1696.  The  goldsmiths  were  charged 
with  gathering  together  ,£30,000  in  notes  for  the  purpose  of 
breaking  the  bank.  The  directors,  knowing  the  purpose  of 
the  demand,  refused  to  redeem  these  notes,  but  voted  to  con- 
tinue their  payments  to  their  ordinary  customers.  Sir  John 
Houblon,,who  was  Lord  Mayor  as  well  as  Governor  of  the 
bank,  succeeded  in  reassuring  the  applicants  for  cash  for  a 
time,  and  the  proprietors  of  the  bank  agreed  to  put  off  their 
dividend.  The  government  failed,  however,  to  make  an  ex- 
pected payment  of  ,£80,000  and  the  bank  was  compelled  to 
accept  an  order  of  the  Lords  of  the  Treasury  on  July  13, 
1696,  that  no  public  notary  should  enter  a  protest  upon  any 
bill  of  the  Bank  of  England  for  fourteen  days.  As  a  protest 
could  only  be  effective  at  that  time  when  thus  entered,  the 
effect  of  the  order  was  a  practical  suspension  of  specie  pay- 
ments, which  lasted  until  the  autumn  of  1697. 

It  is  not  surprising  that  the  bank  was  unable  to  cope  with 
its  difficulties  and  that  many  impracticable  and  speculative 


FIRST  CENTURY  OF   THE  BANK  OF  ENGLAND.      8/ 

schemes  were  set  on  foot,  for  the  time  was  essentially  a  period 
of  transition.  The  industrial  and  commercial  world  had 
barely  set  foot  upon  the  threshold  of  the  wonderful  develop- 
ment of  the  eighteenth  and  ninteenth  centuries.  Great 
Britain  until  the  time  of  Elizabeth  had  been  only  a  .second 
or  third  rate  power  in  Europe,  overshadowed  by  the  great 
Kingdoms  of  France  and  Spain,  by  the  ancient  prestige  of 
the  German  Emperor,  and  by  the  power  of  the  Pope.  Her 
influence  was  raised  by  the  defeat  of  the  Spanish  Armada, 
but  the  population  of  England  and  Wales  at  the  Revolution 
of  1688  was  only  five  and  a  half  millions,  and  the  supremacy 
in  the  money  markets  and  trade  of  the  world  still  belonged 
to  the  bankers  and  merchants  of  Holland  and  Italy.  The 
use  of  bank-notes,  except  as  mere  certificates  against  which 
coin  and  bullion  was  held  to  the  full  amount,  had  begun  only 
thirty  years  before  the  Revolution,  and  the  proper  manage- 
ment of  a  banking  currency  was  almost  purely  a  problem  of 
abstract  theory  rather  than  of  practical  experience.  If  mer- 
chant princes  and  the  kings  of  finance  stood  upon  the  threshold 
of  an  unknown  world,  the  mass  of  the  community  but  dimly 
viewed  it  from  afar.  They  were  easily  deluded  by  extrava- 
gant hopes  and  easily  misled  by  the  fairy  tales  of  the  splendid 
riches  and  possibilities  of  the  Western  Continent.  Least  of 
all  could  the  general  public  be  expected  to  grasp  instantly 
the  fact,  which  is  not  accepted  by  great  masses  of  people 
to-day,  that  a  paper  currency,  in  order  to  have  a  steady 
purchasing  power,  must  be  redeemable  on  demand  in  coin. 
As  Mr.  Cunningham  acutely  says,  regarding  the  run  upon 
the  Bank  of  England  in  1696  : 

This  was  a  principle  which  men  did  not  find  it  easy  to  recognize. 
They  saw  that  the  man  who  had  wealth  in  any  shape  had  credit; 
but  they  did  not  apparently  understand  that  bills  can  only  be  cir- 
culated, when  there  is  a  certainty  that  they  can  be  met  on  presenta- 
tion, and  that  wealth,  in  forms  which  cannot  be  readily  realized,  is 
not  a  satisfactory  basis  for  a  credit  circulation.1 

The  suspension  of  specie  payments  was  naturally  followed 
by  a  depreciation  in  the  bank-notes.     The  discount  on  July 
1  Growth  of  English  Industry  and  Commerce,  II.,  397. 


88  HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

28,  1696,  was  ten  per  cent,  and  October  loth,  twenty  per  cent. 
The  Bullion  Report,  discussing  this  subject  in  1810,  declared 
that  ' '  the  quantity  of  the  notes  became  excessive,  their 
relative  value  was  depreciated,  and  they  fell  to  a  discount  of 
seventeen  per  cent."  This  opinion,  that  the  note  issues 
were  excessive,  is  supported  also  by  the  high  authority  of 
Professor  Rogers,1  but  is  disproved  by  Professor  MacLeod, 
in  so  far  as  excess  of  issues  is  to  be  interpreted  as  implying  a 
larger  supply  of  money  than  could  be  absorbed  by  the  demands 
of  commerce.  That  the  issues  of  the  bank  were  excessive 
in  proportion  to  its  coin  reserve  is  hardly  a  subject  for  dis- 
pute, in  view  of  the  account  submitted  to  the  House  of 
Commons  on  December  4,  1696,  showing  the  amount  due  on 
notes  for  running  cash  to  be  ,£764,196,  and  the  actual  cash 
held  ,£35,664,  in  addition  to  .£9,636  in  goldsmiths'  notes. 
That  the  issues  were  excessive  in  this  sense  is  proved  by  the 
suspension  of  specie  payments,  but  that  they  were  excessive 
in  the  sense  implied  by  the  Bullion  Report  is  shown  to- 
be  untrue  by  the  state  of  exchange  on  Hamburg,  which 
promptly  became  favorable  to  England  upon  the  reform  of 
the  coinage  and  while  bank-notes  were  still  at  a  discount. 
The  test  whether  issues  were  in  excess  of  the  necessities  of 
trade  was  the  state  of  the  foreign  exchanges,  which  were  at 
par  in  coin,  and  the  depreciation  in  the  bank-notes  was 
plainly  due  to  the  fact  that  they  had  ceased  to  be  redeem- 
able in  coin  on  demand.3 

,  The  collapse  of  the  Land  Bank  and  the  necessity  for  new 
government  loans  led  to  the  legislation  of  February  3,  1697, 
to  increase  the  capital  of  the  Bank  of  England  and  give  it 
wider  privileges.  The  charter  was  renewed  until  the  expi- 
ration of  twelve  months  notice  after  August  i,  1710,  and  the 
bank  was  authorized  to  issue  notes  to  the  amount  of  the  sub- 
scriptions for  the  new  loan,  provided  the  notes  were  made 
payable  to  bearer  on  demand.  It  was  declared  that  in 
case  of  default  in  redemption,  the  notes  might  be  paid  at  the 


1  First  Nine  Years  of  the  Bank  of  England,  88. 

2  McLeod,  Theory  and  Practice  of  Banking,  I.,  479-484. 


FIRST  CENTURY  OF  THE  BA&K  OF  ENGLAND.      89 

Exchequer  out  of  the  annuity  due  the  bank,  and  a  trace  of 
the  theory  of  the  legislation  of  1844  appears  in  the  provision 
that  all  notes  above  the  sum  of  ,£1,200,000  were  to  bear  a 
distinguishing  mark.  The  new  subscriptions  for  the  capital 
amounted  to  ,£1,001,171;  and  ^200,000  in  bank-notes  and 
,£800,000  iii  Exchequer  tallies,  which  were  both  below  par, 
were  taken  out  of  circulation.  The  notes  previously  issued 
had  borne  interest,  and  now  rose  above  par,  while  the  bank 
was  able  to  issue  non-interest  bearing  notes  which  circulated 
at  par.  The  subscriptions  to  the  additional  stock  in  1697 
seem  to  have  been  made  by  the  original  shareholders  and 
were  repaid  to  them  between  1697  anc^  r7°7  from  the  profits 
of  the  bank. 

The  government  was  again  in  serious  need  of  money  when 
the  charter  was  renewed  in  1708  until  August  i,  1732,  and 
the  bank  was  authorized  to  double  its  capital  of  ,£2,201,171, 
and  to  circulate  ,£2,500,000  in  Exchequer  bills.  The  next 
extension  of  the  charter  was  made  in  1713  (Statute  I.,  c.  n) 
and  continued  the  bank  until  twelve  months  notice  to  be 
given  after  August  i,  1742.  The  subscription  lists  for  the 
new  stock  were  opened  on  February  22,  1709,  and  the  whole 
sum  was  subscribed  before  one  o'clock.  The  bank  under 
this  arrangement  advanced  ,£400,000  to  the  government 
without  interest  and  surrendered  ,£1,500,000  in  Exchequer 
bills  to  be  cancelled,  upon  condition  of  receiving  an  annuity 
of  ,£106,501.  The  principal  of  both  these  items  was  added 
to  the  permanent  debt,  which  afterwards  became  the  basis 
of  the  note  circulation  of  the  bank.  Calls  for  additional 
capital  were  made  upon  the  stockholders  to  the  amount  of 
,£656,204  in  1709  and  ,£501,448  in  1710.  Several  of  the 
debts  of  the  government  to  the  bank  were  consolidated  in 
1716  and  reduced  from  six  to  five  per  cent.,  and  ,£2,000,000 
in  Exchequer  bills  were  cancelled  in  1718  and  added  to  the 
permanent  debt  due  the  bank  by  the  government.  The 
settlement  of  the  affairs  of  the  South  Sea  Company  in  1721 
resulted  in  the  purchase  of  ,£200,000  in  annuities  by  the 
bank  at  twenty  years'  purchase,  making  a  new  addition  to 
the  permanent  debt  of  ,£4,000,000.  These  loans  increased 


90  HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

the  permanent  debt  to  £9,375,027,  exclusive  of  various  ad- 
vances of  a  different  character  which  had  been  repaid. 

The  South  Sea  Company  was  essentially  a  Tory  institution 
and  they  proposed  as  early  as  1717  to  increase  their  capital 
from  £"10,000,000  to  £"12,000,000  for  the  purpose  of  wiping 
out  the  debt  due  the  Bank  of  England  and  several  minor 
obligations.  The  bank  made  counter  propositions,  but  the 
real  contest  occurred  in  1719  and  1720  over  the  proposition 
of  the  South  Sea  directors  to  assume  the  entire  national  debt. 
It  was  estimated  at  £30,981,712  and  was  to  be  consolidated 
into  one  fund,  to  be  added  to  the  capital  of  the  company  at 
five  per  cent,  interest  annually.  The  company  proposed  to 
pay  a  bonus  of  ,£3,500,000  to  the  government  in  four  in- 
stalments, beginning  in  1721.  The  bank  met  this  remark- 
able proposition  by  an  offer  of  its  own  to  assume  the  entire 
debt  on  terms  which  were  calculated  to  be  about  ,£2,000,000 
more  advantageous  than  those  of  their  rivals.  The  South 
Sea  Company  obtained  three  days  to  amend  their  offer  and 
increased  the  bonus  to  ,£7,567,500.  The  bank  rejoined  with 
another  offer  of  ,£1,700  in  bank  stock  for  every  annuity  of 
,£100  for  ninety-six  and  ninety-nine  )Tears  and  the  reduction 
of  the  interest  on  the  consolidated  debt  after  June  24,  1727, 
to  four  per  cent. 

The  South  Sea  bill  passed  the  House  of  Commons  April  2, 
1720,  by  a  vote  of  172  to  55  and  passed  the  Lords  by  a  vote 
of  83  to  I7.1  The  South  Sea  stock  was  forced  upward  to  a 
preposterous  figure  under  the  influence  of  the  same  fever  of 
speculation  which  raged  at  about  the  same  time  in  France 
over  the  Mississippi  scheme,  but  capital  was  soon  sunk  in 
this  and  other  unproductive  enterprises  and  the  reaction 
wrecked  the  credit  of  the  company  and  came  near  wrecking 
that  of  the  bank.  The  directors  of  the  South  Sea  Company 
appealed  to  the  bank  for  help,  goldsmiths  and  private  bank- 
ers began  to  fail,  and  a  run  upon  the  bank  itself  began,  which 
was  only  staved  off  by  payments  in  light  sixpences  and 
shillings  and  by  engaging  men  to  fill  up  the  line,  draw 


MacLeod,  Theory  and  Practice  of  Banking,  I.,  496-99. 


FIRST  CENTURY  OF   THE  BANK  OF  ENGLAND.      91 

money  and  re-deposit  it  at  another  window.  Fortunately 
the  festival  of  Michaelmas,  during  which  the  bank  was 
usually  closed,  intervened  and  when  it  was  over  the  public 
alarm  had  subsided. 

The  bank  had  weathered  severe  storms,  had  seen  two 
powerful  rivals  crushed  and  its  own  monopoly  confirmed,  and 
justly  felt  that  it  had  proved  its  capacity  to  endure.  Thirty- 
eight  years  after  its  foundation,  on  Thursday,  August  3, 
1732,  the  corner-stone  of  a  new  building  was  laid  in  the 
presence  of  the  Governor  and  other  officials  of  the  bank  in 
Threadneedle  Street.  The  directors  moved  from  their  old 
quarters  in  Grocers'  Hall  on  June  5,  1734,  and  from  that  day 
4 'The  Old  Lady  of  Threadneedle  Street"  occupied  the 
massive  building  which  is  still  consecrated  to  her  use.1  A 
statue  of  King  William,  under  whom  the  first  charter  was 
granted,  stands  in  the  hall,  with  a  Latin  inscription  which 
accords  to  him  the  honor  of  official  founder  of  the  bank. 

When  the  time  approached  for  a  renewal  of  the  charter  in 
1742,  the  bank  advanced  ,£1,600,000  to  the  government 
without  interest  by  a  call  upon  their  proprietors  for  ,£840,- 
004,  which  raised  their  capital  stock  to  ,£9,800,000.  The 
advance  without  interest  was  substantially  part  of  a  pro- 
cess of  conversion  by  which  the  interest  on  the  original 
advance  to  the  government  at  the  foundation  of  the  bank 
and  on  ,£400,000  advanced  in  1708  was  reduced  from  six  to 
three  per  cent.  The  bank  simply  continued  to  receive  the 
old  interest  payment,  but  doubled  the  principal  of  the  loan. 
The  charter  was  extended  at  this  time  until  twelve  months 
notice  after  August  i,  1764.  Another  adjustment  with  the 
government  in  1746  led  to  the  cancellation  of  ,£986,000  of 
Exchequer  bills,  upon  which  the  bank  was  to  receive  an 


1  The  buildings  have  been  much  enlarged  since  and  now  cover  the 
whole  area  between  Threadneedle  Street,  Princes  Street,  Lothbury 
and  Bartholomew  Lane, — a  space  of  more  than  three  acres.  The 
bank  originally  employed  about  fifty  clerks,  but  the  number  is  now 
about  fifteen  hundred  and  the  pay-roll  amounts  to  about  ^"300,000, 
exclusive  of  ^50,000  paid  annually  in  pensions. — H.  J.  W.  Dam, 
The  Bank  of  England,  McClure's  Magazine,  IV.  460. 


92  HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

annuity  of  four  per  cent. ,  and  a  call  upon  the  proprietors  for 
ten  per  cent.,  which  made  the  bank  capital  .£10,780,000. 
The  rate  of  interest  on  portions  of  the  debt  amounting  to 
.£8,486,000,  which  had  not  yet  been  reduced,  was  changed 
to  three  and  a  half  per  cent,  in  1749  for  the  seven  years 
beginning  with  Christmas,  1750,  and  thereafter  to  three  per 
cent.  '  The  charter  was  renewed  in  1764  until  twelve  months 
notice  after  August  i,  1786,  upon  the  conditions  of  a  direct 
payment  to  the  Exchequer  of  .£110,000  and  a  loan  for  two 
years  on  Exchequer  bills  of  .£1 ,000,000  at  three  per  cent.  The 
next  renewal,  in  1781,  carried  the  charter  along  until  twelve 
months  notice  after  August  i,  1812,  and  provided  for  a  loan 
for  three  years  of  ,£2,000,000  at  three  per  cent.  A  call  upon 
the  proprietors  for  ,£862,400  in  1782  advanced  the  capital  of 
the  bank  to  ,£11,642,400,  at  which  it  remained  until  1816, 
when  it  was  increased  to  .£14,553,000  by  adding  twenty-five 
per  cent,  to  the  stock  of  each  proprietor  from  the  reserved 
profits  or  "  rest." 

The  Bank  of  England  at  its  institution  enjoyed  no  monop- 
oly of  note  issues,  so  that  Chamberlain's  plan  for  a  Land 
Bank  was  not  a  violation  of  the  privileges  of  the  older  estab- 
lishment. The  managers  of  the  Bank  of  England  endeavored 
to  protect  themselves  in  the  legislation  of  1697  an<^  secured 
a  provision  that  during  the  continuance  of  the  corporation 
no  other  institution  in  the  nature  of  a  bank  should  be  erected 
or  countenanced  within  the  Kingdom  by  act  of  Parliament 
by  bodies  exceeding  six  persons.  This  provision  was  calcu- 
lated to  prevent  the  formation  of  strong  joint  stock  banks,, 
and  dangerous  rivalry  was  not  feared  from  private  firms  of 
six  persons  with  unlimited  liability.  An  effort  to  narrow 
the  limits  still  more  closely  was  made  in  the  Act  of  1709  by 
making  it  unlawful  "  for  any  body  politic  or  corporate  what- 
soever, created  or  to  be  created  (other  than  the  said  Gover- 
nor and  Company  of  the  Bank  of  England),  or  for  any  other 

1  The  operation  of  1752,  by  which  the  balance  of  annuities  granted 
in  1721  were  consolidated  with  other  three  per  cent,  stocks,  gave  rise 
to  the  familiar  designation,  "  Three  per  cent,  consols,"  the  latter  word 
being  a  contraction  of  "consolidated. — "Gilbart,  I,  43. 


FIRST  CENTURY  OF  THE  BANK  OF  ENGLAND.      93 

persons  whatsoever,  united  or  to  be  united  in  covenants  or 
partnership,  exceeding  the  number  of  six  persons,  in  that 
part  of  Great  Britain  called  England,  to  borrow,  owe,  or 
take  up  any  sum  or  sums  of  money  on  their  bills  or  notes, 
payable  at  demand,  or  at  any  less  time  than  six  months  from 
the  borrowing  thereof."  This  clause  was  repeated  in  1716, 
when  the  usury  laws  were  suspended  as  to  the  Bank  of 
England  and  the  directors  were  authorized,  "at  their  own 
good  liking"  to  borrow  or  take  up  money  at  any  rate  of 
interest  they  pleased.  The  conception  of  banking  at  this 
time  involved  necessarily  the  privilege  of  issuing  circulating 
notes,  and  it  was  determined  to  close  all  loop-holes  in  this 
matter  upon  the  renewal  of  the  charter  in  1742.  It  was 
accordingly  provided  (15  George  II.,  c.  13,  s.  5)  : 

And  to  prevent  any  doubts  that  may  arise  concerning  the  privi- 
lege or  power  given  by  former  Acts  of  Parliament,  to  the  said  Governor 
and  Company  of  exclusive  banking,  and  also  in  regard  to  the  erecting 
of  any  other  bank  or  banks  by  Parliament,  or  restraining  other  per- 
sons from  banking  during  the  continuance  of  the  said  privilege 
granted  to  the  Governor  and  Company  of  the  Bank  of  England,  as 
before  recited,  it  is  hereby  further  enacted  and  declared,  by  the 
authority  aforesaid,  that  it  is  the  true  intent  and  meaning  of  the  Act 
that  no  other  bank  shall  be  erected,  established  or  allowed  by  Parlia- 
ment, and  that  it  shall  not  be  lawful  for  any  body  politic  or  corporate 
whatsoever,  erected  or  to  be  erected,  or  for  any  other  persons  what- 
soever, united  or  to  be  united,  in  covenants  or  partnership,  exceeding 
the  number  of  six  persons,  in  that  part  of  Great  Britain  called  England, 
to  borrow,  owe,  or  take  up  any  sum  or  sums  of  money,  on  their  bills 
or  notes,  payable  at  demand,  or  at  any  less  time  than  six  months 
from  the  borrowing  thereof  during  the  continuance  of  such  said  privi- 
lege of  the  said  Governor  and  Company,  who  are  hereby  declared 
to  be  and  remain  a  corporation  with  the  privilege  of  exclusive  bank- 
ing, as  before  recited. 

This  limitation  upon  the  power  of  other  corporations  did 
not  prevent  the  issue  of  promissory  notes  and  checks ;  nor 
did  it  prevent  the  issue  of  bank-notes  by  individuals  and 
firms  of  not  exceeding  six  persons.  The  opportunity  which 
this  afforded  for  the  creation  of  joint  stock  banks  of  dis- 
count and  deposit  was  not  understood  and  availed  of  till 


94  HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

much  later,  but  the  opportunity  for  the  issue  of  circulating 
notes  by  individuals  and  small  firms  was  availed  of.  The 
notes  of  the  Bank  of  Kngland  had  little  circulation  outside 
of  London  and  the  rapid  development  of  canal  building  and 
other  enterprises  during  the  last  half  of  the  eighteenth  cen- 
tury created  a  demand  for  a  larger  credit  currency.  Professor 
MacLeod  declares,  in  speaking  of  the  principle  of  monopoly 
embodied  in  the  charter  of  1697,  that  ''The  frightful  con- 
vulsions and  collapses  of  public  credit  which  have  taken 
place  during  the  last  three-quarters  of  a  century  are  chiefly 
due  to  this  great  wrong."1  The  effect  was  not  felt  until 
nearly  a  century  later,  when  England  began  to  take  her 
place  at  the  head  of  the  commercial  nations,  but  after  the 
crisis  of  1782  "  multitudes  of  miserable  shopkeepers  in  the 
country,  grocers,  tailors,  drapers,  started  up  like  mushrooms 
and  turned  bankers,  and  issued  their  notes,  inundating  the 
country  with  their  miserable  rags."  Burke  said  that  when 
he  came  to  Kngland  in  1750  there  were  not  twelve  bankers 
out  of  London  ;  in  1793  there  were  nearly  four  hundred. 
The  Bank  of  Kngland  began  to  issue  notes  for  ^10  and  ^"15 
as  early  as  1759,  but  the  private  bankers  issued  them  for 
smaller  amounts,  and  in  1775  an  act  was  passed  to  prohibit 
notes  of  less  than  twenty  shillings,  and  two  years  afterwards 
the  limit  was  raised  to  ^5. 

The  prohibition  upon  note  issues  was  probably  one  of  the 
causes  which  contributed  to  the  use  of  checks.  The  notes 
issued  by  private  bankers  were  at  first  written  on  paper  for 
any  odd  sum,  like  promissory  notes.  The  practice  was  in- 
troduced by  Child  and  Co.,  in  1729,  of  having  the  notes 
partly  printed  and  partly  written,  like  a  modern  check. 
These  notes  continued  to  be  issued  till  about  1793,  when  the 
existing  system  was  introduced,  of  giving  the  depositor  a 
credit  for  the  full  amount  of  his  deposit  and  authorizing  him 
to  draw  checks  at  his  convenience  against  it.2  The  issue  of 

1  Theory  and  Practice  of  Banking,  I.,  479. 

2  MacLeod,    Theory  and  Practice  of  Banking,   I.,  331,  515.     M. 
Juglar  (343)  says  that  the  use  of  checks  replaced  the  use  of  bills  in 
1772. 


FIRST  CENTURY  OF  THE  BANK   OF  ENGLAND.      95 

notes  by  private  bankers  was  not  forbidden  until  the  Bank 
Act  of  1844,  but  their  use  gradually  diminished  as  the 
greater  convenience  of  checks  came  to  be  understood.  The 
Act  of  1742  would  probably  have  prohibited  joint  stock  banks 
of  discount  and  deposit,  if  it  had  been  supposed  that  they 
could  be  carried  on  without  the  issue  of  notes,  but  note 
issues  were  then  regarded  as  a  necessary  part  of  successful 
banking. 

The  Bank  of  England  had  to  face  serious  financial  crises 
in  1772,  1782,  and  1792.  Their  policy  in  1772  and  1782  was 
to  support  credit  and  to  make  advances  to  solvent  merchants, 
with  the  result  that  the  foreign  exchanges  turned  in  their 
favor  and  general  bankruptcy  was  avoided.  Mr.  Bosanquet 
was  Governor  of  the  bank  and  he  adopted  the  policy  of  con- 
tracting issues  while  the  drain  of  specie  was  going  on  and 
expanding  them  when  the  tide  turned.  The  crisis  of  1793 
was  precipitated  by  the  breaking  out  of  war  with  France, 
and  was  quickly  followed  by  the  stoppage  of  about  one  hun- 
dred country  banks  and  the  serious  embarrassment  of  many 
others.  The  directors  of  the  bank  became  alarmed,  refused 
credit  to  strong  houses  and  created  a  great  scarcity  in  the 
circulating  medium  by  the  discredit  cast  on  the  notes  of  the 
country  banks.  The  policy  of  contracting  issues  was  not 
justified  by  the  state  of  the  exchanges,  for  gold  and  silver 
were  pouring  into  England  from  France  in  consequence  of 
the  issue  of  the  assignats,  which  rapidly  drove  coin  out  of 
circulation,  and  exchange  was  favorable  with  both  Amster- 
dam and  Hamburg.  The  absolute  refusal  of  the  bank  to 
lend  its  support  to  credit  compelled  the  issue  of  Exchequer 
bills  by  the  government,  which  quickly  improved  the  situa- 
tion. 

The  long  suspension  of  specie  payments  during  the  wars 
with  France  was  brought  about  by  the  reckless  and  un- 
scrupulous course  of  Mr.  Pitt,  who  dictated  the  entire 
policy  of  the  government.  The  relations  of  the  bank  with 
the  government  had  grown  closer  from  year  to  year  since 
1718,  when  subscriptions  to  public  loans  were  first  received 
there,  as  affording  greater  convenience  than  the  Treasury- 


g6  HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

The  bank  soon  after  began  to  make  advances  of  money  in 
anticipation  of  the  land  and  malt  taxes,  and  upon  Exchequer 
bills  and  other  securities.1  They  did  this  in  the  face  of  the 
provision  of  the  charter  of  1694,  that  if  they  should  advance 
any  money  to  the  Crown  whatever,  except  by  the  special 
permission  of  Parliament,  they  should  forfeit  treble  the  value 
of  all  such  advances.  The  usual  limit  of  these  temporary 
advances  was  ,£20,000  or  ,£30,000  and  it  became  a  subject 
of  complaint  if  the  amount  was  increased  to  ,£50,000.  The 
limit  was  stretched  in  the  American  war  to  £,  150,000  and 
Mr.  Bosanquet  in  1793  became  uneasy  as  to  the  legality  of 
such  advances  without  authority  of  Parliament.  The  direc- 
tors, therefore,  applied  for  an  act  of  indemnity  for  past 
advances  and  permission  to  make  them  in  the  future  to  a 
limited  amount,  not  to  exceed  .£100,000.  Mr.  Pitt  readily 
agreed  to  bring  in  a  bill  for  this  purpose,  but  he  quietly 
dropped  the  limitation  and  passed  the  measure  in  this  form 
through  Parliament.  He  was  now  armed  with  absolute 
power  to  draw  upon  the  bank,  unless  the  directors  should 
refuse  to  honor  his  bills,  and  he  was  neither  conservative  nor 
scrupulous  in  the  use  of  the  power. 

Mr.  Pitt  availed  himself  of  the  new  law  to  scatter  gold 
broadcast  over  Kurope  to  promote  the  combination  against 
France,  with  the  result  of  draining  the  country  of  specie  and 
creating  unfavorable  foreign  exchanges.  He  drew  heavily 
upon  the  bank  and  drove  them  into  such  close  quarters  that 
they  passed  a  resolution  on  January  15,  1795,  that  the  Chan- 
cellor of  the  Exchequer  must  make  his  financial  arrange- 
ments for  the  year  without  expecting  further  assistance  from 
them  than  advances  on  Treasury  bills  not  exceeding  ,£500,- 
ooo  at  any  one  time.  Mr.  Pitt  promised  to  reduce  the  exist- 
ing advances  to  that  amount  by  payments  out  of  the  first 
loan  which  was  in  process  of  subscription,  but  he  paid  little 
attention  to  such  promises.  The  bank  was  compelled  by  the 
demands  of  the  government  to  expand  its  issues  in  the 
face  of  unfavorable  exchanges  until  in  February,  1795,  they 


1  Gilbart,  I.,  36. 


FIKST  CENT 'UR Y  OF  THE  BANK  OF  ENGLAND.      97 

reached  ^14,000,000.  The  drain  of  gold  set  in  strongly  in 
September,  the  price  of  gold  in  bank-notes  rose  to  ^4  2s.  per 
ounce  (about  five  shillings  above  parity,  which  was  ^3  ijs. 
io^^/.),  and  the  directors  of  the  bank  were  compelled  to 
sharply  restrict  their  discounts.  They  gave  -notice  on  De- 
cember 31,  1795,  that  if  the  applications  for  discounts  on  any 
day  exceeded  the  sum  to  be  advanced,  &  pro  rata  proportion 
of  each  applicant's  bills  should  be  returned,  "without  regard 
to  the  respectability  of  the  party  sending  in  the  bills  or  the 
solidity  of  the  bills  themselves."  Matters  went  from  bad 
to  worse  until  February  u,  1796,  when  the  court  of  directors 
adopted  the  resolution  : 

That  it  is  the  opinion  of  the  Court,  founded  upon  its  experience  of 
the  effects  of  the  late  Imperial  loan,  that  if  any  further  loan  or  ad- 
vance of  money  to  the  Emperor,  or  other  foreign  state,  should  in  the 
present  state  of  affairs,  take  place,  it  will  in  all  probability  prove  fatal 
to  the  Bank  of  England. 

The  Court  of  Directors  do  therefore  most  earnestly  deprecate  the 
adoption  of  any  such  measure,  and  they  solemnly  protest  against  any 
responsibility  for  the  calamitous  consequences  that  may  follow  there- 
upon. 

Mr.  Pitt  replied  that  after  the  repeated  promises  he  had 
made  he  saw  no  occasion  for  the  resolutions  and  should  re- 
gard them  as  having  been  adopted  in  a  moment  of  needless 
alarm.  This  did  not  prevent  him  from  continuing  secret  re- 
mittances to  the  Continent,  but  suspension  of  specie  pay- 
ments was  staved  off  until  the  next  year  by  the  restriction 
of  accommodation  to  merchants  and  the  favorable  crops  of 
1796.  The  advances  upon  Treasury  bills  amounted  on  June 
14,  1796,  to  /i,  232, 649  and  Mr.  Pitt  demanded  ^"800,000 
more  in  July  and  a  like  sum  in  August.  The  bank  re- 
fused the  second  demand  but  granted  a  request  by  Mr.  Pitt 
in  November  for  ,£2, 750,000,  on  condition  that  the  advances 
on  Treasury  bills  should  be  paid  out  of  this  loan.  "Mr. 
Pitt,"  in  the  terse  language  of  Professor  MacLeod,  "took 
the  money  but  never  paid  off  the  bills."  2 

1  Gilbart,  I.,  45. 

*  Theory  and  Practice  of  Banking,  I.,  524. 


98  HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

The  landing  of  a  French  frigate  in  one  of  the  Welsh  har- 
bors and  orders  from  the  government  to  the  farmers  to  drive 
their  stock  into  the  interior,  caused  a  run  upon  the  Bank  of 
England  which  finally  brought  the  long  dreaded  catastrophe 
of  suspension  of  payment  in  coin.  The  bank  had  been  mak- 
ing frantic  efforts  for  several  weeks  to  contract  -their  issues  and 
had  reduced  them  from  ^10,550,830  on  January  21,  1797,  to 
,£8,640,250  on  February  25th,  but  their  cash  was  reduced  on 
the  latter  date  to  £  1,27 2,000.  The  cabinet  met  the  next  day, 
which  was  Sunday,  and  issued  an  Order  in  Council,  ' '  That 
the  directors  of  the  Bank  of  England  should  forbear  issuing 
any  cash  in  payment  until  the  sense  of  Parliament  can  be 
taken."  '  A  meeting  of  merchants  was  held  on  Monday, 
with  the  Lord  Mayor  in  the  chair,  which  adopted  a  resolu- 
tion similar  to  that  adopted  on  the  successes  of  the  Pretender 
in  Scotland  in  1745,  that  "  we  will  not  refuse  to  receive  bank- 
notes in  payment  of  any  sum  of  money  to  be  paid  us,  and 
we  will  use  our  utmost  endeavors  to  make  all  our  payments 
in  the  same  manner."  A  select  committee  was  appointed 
by  Parliament  to  inquire  into  the  bank's  affairs,  and  found 
them  in  a  prosperous  condition  except  for  the  scarcity  of  coin 
and  bullion.  Their  assets  were  ,£17,597,280,  representing  a 
surplus  of  ,£3,826,890,  exclusive  of  the  government  debt  of 
^"11,686,800,  which  paid  three  per  cent.  Suspension  of  pay- 
ments was  enacted  until  June  24th  and  the  bank  was  au- 
thorized to  issue  notes  under  ,£5.  The  bank-notes  were 
made  legal  tender  and  were  to  be  received  at  par  in  the 
payment  of  taxes.  The  bank  was  authorized  to  receive 
special  deposits  in  coin  in  exchange  for  notes  and  to  repay 
three-fourths  of  the  amount  in  coin  if  demanded.  The  re- 
striction was  prolonged  on  June  22d  to  one  month  after  the 
meeting  of  the  next  session  of  Parliament  and  was  again 
prolonged  on  November  3Oth,  at  the  next  session,  until  six 
months  after  the  conclusion  of  a  definitive  treaty  of  peace. 

The  policy  of  the  bank  in  restricting  commercial  discounts, 
though  forced  upon  it  in  a  measure  by  the  demands  of  the 

1  Levi,  74. 


FIRST  CENTURY  OF  THE   BANK  OF  ENGLAND.      99 

government,  was  the  cause  of  serious  complaint  in  the  mer- 
cantile community  and  led  to  much  discussion  of  other 
methods  of  meeting  the  demand  for  credit.  The  bank  re- 
fused to  establish  branches  in  the  country  and  their  charter 
prohibited  any  other  strong  company  from  doing  so.  The 
very  policy  of  restricting  their  issues  in  the  autumn  of  1796, 
which  the  directors  regarded  as  a  measure  of  extreme  pre- 
caution, intensified  the  demand  for  gold  by  creating  a  scarcity 
of  currency  which  led  to  the  withdrawal  of  gold  by  deposi- 
tors. The  irritation  among  the  merchants  was  such  that  a 
meeting  was  held  in  L,ondon  Tavern  on  April  2,  1796,  which 
appointed  a  committee  to  devise  a  plan  to  restore  the  circulat- 
ing medium,  if  practicable  without  infringing  the  monopoly 
of  the  bank.  Mr.  Walter  Boyd,  an  eminent  merchant,  drew 
up  a  report  on  behalf  of  the  committee,  authorizing  a  board 
of  twenty-five  members  to  be  named  by  Parliament  to  issue 
circulating  promissory  notes  upon  deposits  of  coin,  bank- 
bills,  and  commercial  paper. l  The  committee  were  persuaded 
by  the  Chancellor  of  the  Exchequer  to  delay  action  and  noth- 
ing ever  came  of  their  plan,  but  it  was  the  opinion  of  Mr. 
Boyd  that  the  public  stocks  suffered  as  well  as  commercial 
paper  by  the  scarcity  of  currency  and  the  necessity  of  forced 
sales  of  securities  to  obtain  it.  Sir  William  Pulteney,  during 
the  debate  on  the  bill  authorizing  the  suspension  of  cash 
payments,  asked  leave  to  bring  in  a  bill  for  another  bank  if 
the  Bank  of  England  did  not  resume  on  June  24,  1797,  as 
was  then  proposed.  The  proposition  was  defeated  at  the 
time  but  gained  such  strength  within  the  next  two  years 
that  public  meetings  were  held  and  pamphlets  written  in  its 
support.  The  bank  directors  became  alarmed,  and  as  gov- 
ernment was  still  pressing  for  money,  they  offered  .£3,000,- 
ooo  without  interest  for  six  years  as  the  price  of  a  renewal 
of  the  charter.  Mr.  Pitt  accepted  the  terms  and  passed  a 
bill  in  1800  extending  the  monopoly  of  the  bank  for  twenty- 
one  years  after  1812,  or  until  1833. 

1  MacLeod,  Theory  and  Practice  of  Banking,  I.,  523. 


CHAPTER  V. 

SECOND  CENTURY  OF  THE  BANK  OF  ENGLAND. 

The  Continued  Suspension  of  Specie  Payments — The  Bullion  Report 
and  the  Act  of  1819 — The  Contest  against  the  Monopoly  of  the 
Bank  of  England  and  the  Rise  of  the  Joint  Stock  Banks — The 
Bank  Act  of  1844 — Theory  of  its  Operation  and  its  Failure  to 
Carry  Out  the  Theory — The  Recent  Accumulation  of  Gold  in 
the  Bank. 

THE  great  events  of  the  second  century  of  the  history  of 
the  Bank  of  England  have  been  the  resumption  of 
cash  payments,  the  restriction  of  circulation  by  the 
Bank  Act  of  1844,  and  the  recent  accumulation  of  gold  in 
the  custody  of  the  bank.  The  Act  of  1844  has  been  the 
turning  point  of  almost  infinite  discussion  of  the  theory  and 
practice  of  banking  in  England,  but,  whatever  its  merits  or 
defects,  it  has  not  destroyed  the  character  of  the  Bank  of 
England  as  the  guardian  of  the  cash  reserve  of  the  country, 
nor  prevented  London  from  becoming  the  centre  of  the 
exchanges  of  the  world.  Freedom  from  danger  of  invasion, 
the  development  of  banking  and  credit  beyond  any  point 
attained  elsewhere,  a  market  free  to  the  world's  commerce, 
and  a  single  fixed  standard  of  value  have  raised  England  to 
supremacy  among  commercial  countries  and  linked  the  his- 
tory of  her  financial  progress  in  some  degree  with  that  of  all 
other  nations. 

The  British  nation  was  far  from  her  present  position  at 
the  close  of  the  Napoleonic  wars.  Political  and  military 
triumphs  had  come  to  her,  but  they  had  been  at  the  expense 
of  the  crippling  of  her  merchant  marine,  the  increase  of  her 


SECOND   CENTURY  OF   THE  BANKOFENlAND.      oi 

debt  to  $4,000,000,000,  and  the  suspension  of  payments  in 
specie.  The  Bank  of  England  by  prudent  management 
kept  its  notes  for  several  years  at  par  with  coin  and  the 
depreciation  was  at  first  so  gradual  as  hardly  to  be  noticed. 
One  of  the  elements  of  confusion  in  the  discussion  of  the 
effect  of  the  restriction  of  specie  payments  was  the  fact  that 
bank-notes  became  the  sole  medium  of  ordinary  transactions. 
The  issue  of  ^i  notes  by  the  bank  drove  the  gold  from  cir- 
culation even  before  the  depreciation  of  the  paper  and  made 
metal  only  a  subsidiary  money.  If  an  effort  had  been  made 
to  keep  the  circulation  saturated  with  coin  by  continuing 
the  prohibition  upon  notes  below  ^5,  the  depreciation  of 
the  paper  would  have  been  quickly  felt  by  the  disappearance 
of  gold  and  accurately  measured  by  the  premium  upon  gold. 
The  fact  that  the  paper  was  maintained  at  a  substantial 
parity  with  gold  for  nearly  ten  years  while  gold  disappeared 
from  circulation,  misled  those  who  did  not  look  to  the  simple 
and  indisputable  facts  regarding  the  foreign  exchanges  which 
were  stated  in  the  celebrated  Bullion  Report  of  1810.  Silver 
had  been  rapidly  disappearing  from  circulation  for  some 
years,  because  the  English  mint  ratio  gave  it  a  less  value 
in  relation  to  gold  than  the  market  price.  The  country 
bankers  were  authorized  by  the  restriction  laws  to  redeem 
their  notes  in  Bank  of  England  notes  in  exactly  the  same 
manner  as  they  had  formerly  done  in  specie,  so  that  the  ex- 
pansion and  contraction  of  the  country  note  issues  was  in  a 
measure  placed  in  the  hands  of  the  central  bank  as  well  as 
the  control  of  its  own  circulation. 

Bullion  rapidly  accumulated  in  the  bank  after  the  suspension 
of  specie  payments  and  the  bank  announced  their  willingness 
on  January  3,  1799,  to  redeem  sums  under  ^5  and  to  pay  in 
full  after  February  ist,  notes  for  £i  and  £2,  dated  prior  to 
July  i,  I798.1  The  bank  then  held  ,£7,000,000  in  coin  and 
bullion  and  had  increased  its  note  issues  to  ,£16,000,000.  The 
government  were  not  willing  to  take  the  risk  of  resumption 
and  continued  the  restriction  even  after  the  peace  of  Amiens, 


Gilbart  I.,  49. 


"l(52  *    *  *tflSTOR  Y 'OF  MO'DERN  BANKS  OF  ISSUE. 

when  the  bank  again  declared  that  it  was  well  supplied  with 
cash  and  was  ready  to  resume.  A  bill  was  brought  in  on 
April  9,  1802,  only  thirteen  days  after  the  signature  of  the 
definitive  treaty,  to  continue  the  restriction  until  March  i, 
1803,  and  the  restriction  was  continued  again  on  February  28, 
1803,  until  six  weeks  after  the  beginning  of  the  next  session 
of  Parliament.  War  broke  out  before  this  date  arrived  and 
the  restriction  was  continued  until  six  months  after  the 
ratification  of  a  definitive  treaty  of  peace.  No  such  treaty 
was  ratified  until  after  the  abdication  of  Napoleon  in  the 
spring  of  1814,  when  the  problem  of  restriction  was  again 
taken  up. 

The  price  of  gold  began  to  rise  in  September,  1799,  and 
in  June,  1800,  had  reached  ^4  55.  per  ounce,  which  was  about 
seven  shillings  above  the  mint  price.1  Kxchange  with  Ham- 
burg fell  and  the  unfavorable  state  of  the  exchanges  was 
made  an  excuse  for  postponing  the  resumption  of  specie 
payments  after  the  peace  of  Amiens.  The  fact  that  the  un- 
favorable exchange  was  due  to  the  depreciation  of  the  cur- 
rency was  denied  or  evaded  by  the  Parliamentary  leaders 
and  Mr.  Addington,  the  Chancellor  of  the  Exchequer,  urged 
that  the  restriction  be  continued  because,  ' '  for  several  months 
past,  there  has  been  a  trade  carried  on  for  purchase  of  guineas 
with  a  view  to  exportation." 


1  The  mint  price  of  gold  was  ^3  175.  io}4d.,  which  was  four  and  a 
half  pence  above  the  market  price,  in  order  to  cover  the  cost  of  coin- 
age and  the  loss  of  interest  while  the  bullion  was  detained  in  the 
mint.  The  value  of  gold  coins  was  fixed  as  they  exist  to-day  in  1717, 
when  it  became  necessary,  upon  the  recommendation  of  Sir  Isaac 
Newton,  to  reduce  the  coining  value  of  the  gold  in  the  guinea  to  arrest 
the  exportation  of  silver.  The  reduction  made  the  ratio  of  gold  to 
silver  about  fifteen  and  a  quarter  to  one,  but  as  the  ratio  in  France 
and  Holland  was  about  fourteen  and  a  half,  it  continued  to  be  profit- 
able to  export  silver  from  England  to  those  countries  and  to  import 
gold  into  England.  Silver  disappeared  from  circulation,  gold  became 
the  sole  metallic  medium  of  exchange,  because  it  was  the  cheaper 
metal  at  the  legal  ratio,  and  the  law  of  1816,  which  gave  England  the 
gold  standard,  simply  recognized  in  law  what  had  been  the  fact  prior 
to  the  suspension  of  cash  payments. 


SECOND  CENTURY  OF   THE  BANK  OF  ENGLAND.    103 

An  object  lesson  in  the  effects  of  a  depreciated  currency 
was  afforded  the  English  people  by  the  condition  of  affairs 
in  Ireland,  which  had  a  currency  of  her  own.  The  Irish 
shilling  contained  thirteen  pence,  and  as  the  pound,  both 
English  and  Irish,  contained  two  hundred  and  forty  pence, 
English  money  was  more  valuable  than  Irish  in  the  propor- 
tion of  ^100  to  ;£io8  6s.  $>d.  The  par  of  exchange  between 
England  and  Ireland  was  therefore  called  eight  and  one  third. 
The  Bank  of  Ireland  was  directed  to  suspend  specie  pay- 
ments at  the  same  time  as  the  Bank  of  England,  and  exchange 
was  maintained  at  a  point  favorable  to  Ireland  until  the 
autumn  after  the  passage  of  the  restriction  act  in  England. 
Exchange  then  began  to  fall,  which  made  it  unfavorable  to 
Ireland,  until  in  January,  1804,  it  had  reached  a  depression 
of;£i8  in  the  hundred.  The  bank  had  been  increasing  its 
issues  until  they  were  more  than  four  times  the  amount  at 
the  time  of  the  restriction.  A  committee  of  Parliament  was 
appointed  in  1804  to  consider  the  subject  and  they  found 
that  the  exchanges  were  nominally  unfavorable  because  of 
the  depreciation  of  the  Irish  paper.  The  directors  of  the 
Bank  of  Ireland  who  appeared  before  the  committee  would 
not  admit  that  this  was  the  case  and  maintained  that  the 
large  issues  of  paper  money  were  to  supply  the  place  of 
gold  which  had  been  taken  out  of  the  country  to  pay  remit- 
tances. One  of  them  advanced  the  same  extraordinary 
doctrine  advanced  a  few  years  later  in  England,  that  "the 
mere  buying  of  gold  at  an  advanced  price  beyond  that  of  the 
mint,  is  the  effect,  and  not  the  cause  of  the  exchange,  and, 
therefore,  no  proof  of  the  depreciation  of  the  paper  itself." 

The  committee  refused  to  be  misled  by  this  sort  of  argu- 
ment and  found  that  the  real  exchange,  when  allowance  was 
made  for  the  depreciation  in  the  paper,  was  favorable  to 
Ireland.  A  convincing  proof  that  it  was  so,  if  there  were  no 
others,  was  found  in  the  fact  that  the  exchanges  between 
England  and  Belfast  were  favorable  to  Belfast,  because  pay- 
ments at  Belfast  were  made  in  specie,  at  the  very  moment 
that  they  were  unfavorable  at  Dublin,  where  paper  was  the 
standard.  Still  further  demonstration  of  the  simple  mathe- 


104          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

matical  proposition,  that  the  fall  in  the  exchange  was 
measured  by  the  depreciation  in  the  paper  money,  and  not  by 
any  cause  common  to  Irish  industry  or  banking,  was  afforded 
by  the  fact  that  there  was  a  local  difference  of  exchange  be- 
tween Dublin  and  Belfast,  which  put  specie  at  a  premium  of 
ten  or  twelve  per  cent,  in  Dublin,  while  it  passed  at  par  in 
Belfast  as  the  only  medium  of  exchange.1  The  committee 
recommended  that  the  relations  between  the  currencies  of 
the  two  countries  be  simplified  by  making  the  notes  of  the 
Bank  of  Ireland  payable  in  Bank  of  England  paper  and  that 
the  Bank  of  Ireland  establish  a  fund  in  London  for  that  pur- 
pose. Little  attention  seems  to  have  been  paid  to  this  report 
and  the  recommendation  that  the  currencies  be  assimilated, 
which  was  made  by  Mr.  Parnell  in  Parliament  in  1809,  was 
rejected  without  a  division. 

The  depreciation  of  the  Bank  of  England  notes  did  not 
advance  rapidly  until  the  period  of  commercial  speculation 
which  caused  the  panic  of  1810.  The  price  of  gold  in  bank 
paper,  which  had  risen  to  ^4  55.  per  ounce  in  1800,  fell  back 
to  about  ^4,  representing  a  depreciation  of  two  and  a  half 
shillings  or  about  three  and  two-tenths  per  cent.,  and  re- 
mained at  substantially  this  figure  until  1809.  The  price  of 
gold  rapidly  advanced  during  the  following  year  until  the 
mint  price  of  gold  was  ^4  us.  or  a  depreciation  of  17.4  per 
cent.  Exchange  with  Hamburg  had  been  falling  with  the 
depreciation  of  the 'currency  and  on  February  i,  1810,  Mr. 
Horner  moved  for  several  accounts  relating  to  the  currency 
and  exchanges.  The  committee  was  then  appointed  whose 
work  has  become  so  famous  in  the  literature  of  finance  as 
the  Bullion  Report.  The  committee,  in  an  endeavor  to  ascer- 
tain the  true  cause  of  the  unfavorable  exchanges,  examined 
a  large  number  of  witnesses,  including  directors  of  the  Bank 
of  England,  private  bankers,  business  men,  and  students  of 
finance.  The  conclusions  of  the  committee,  however,  were 
directly  adverse  to  the  opinions  of  the  bankers  and  in  accor- 
dance with  those  of  the  most  enlightened  students  of  the 
abstract  problems  of  finance  and  political  economy. 

'MacLeod,  Theory  and  Practice  of  Banking,  II.,  14. 


SECOND   CENTURY  OF  THE  BANK   OF  ENGLAND.    1 05 

The  report  which  the  committee  presented  to  the  House 
of  Commons  took  its  place  at  once  among  the  classics  of 
finance  and  has  been  one  of  the  guides  of  sound  banking 
from  that  time  to  this.  It  is  a  remarkable  fact  that  Mr. 
Horner  was  a  young  man  of  thirty-two  who  had  never  given 
more  than  a  general  attention  to  financial  subjects.  He 
simply  listened  attentively  to  the  testimony  of  the  best  ex- 
perts who  appeared  before  the  committee  and  with  singular 
clearness  of  vision  grasped  the  correct  principles  of  regulating 
a  banking  currency  and  discarded  the  shallow  sophistries 
and  ' '  practical  rules  ' '  which  were  presented  to  him  by  the 
great  bankers  of  London. '  The  Bullion  Report  is  remarkable 
not  only  for  the  clearness  and  precision  with  which  it  lays 
down  the  fundamental  rules  for  regulating  the  volume  of  a 
paper  currency,  but  for  the  discriminating  judgment  with 
which  it  discusses  limitations  of  the  then  existing  theories 
of  prices  and  currency  which  only  came  to  be  generally 
accepted  by  political  economists  a  generation  later  and  have 
not  been  accepted  by  all  of  them  to-day. a 

The  undisputed  facts  upon  which  the  bullion  committee 
based  their  report  are  summed  up  by  Professor  MacLeod  as 
follows 3  : 


1  M.  Juglar  remarks  that,  "  There  is  always  something  which  blinds 
those  the  best  placed  to  see,  and  it  is  not  the  persons  engaged  in 
affairs  who  are  the  best  judges  of  the  mechanism  they  direct  or  which, 
rather,  sweeps  them  along." — DCS  Crises  Commerciales,  341.     For 
similar  views  see  Price,  Currency  and  Banking,  3-4  ;  Bagehot,  Lom- 
bard  Street,  Works,  V.,  112-15. 

2  Mr.  Horner  himself  expressed  a  modest  opinion  of  the  literary 
merits  of  the  report,  but  declared  that  it  possessed  one  great  merit, 
"  That  it  declares  in  very  plain  and  pointed  terms  both  the  true  doc- 
trine, and  the  existence  of  a  great  evil  growing  out  of  the  neglect  of 
that  doctrine."     Portions  of  the  report  were  written   by  Mr.  Hus- 
kisson  and  Mr.  Thornton,    but  the  inspiring  spirit  was  largely  Mr. 
Homer's.     The  views  set  forth  were  not  new  and  had  been  so  clearly 
stated  by   Mr.  Ricardo   in  his  pamphlet  on    "The   High   Price  of 
Bullion,"  that  some  of  Mr.  Ricardo's  friends  accused  Mr.  Horner 
of  borrowing  the  ideas  without  proper  credit. 

3  Theory  and  Practice  of  Banking,  II.,  29. 


106  HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

1.  That  the  mint  price  of  gold  bullion,  or  the  legal  stand- 
ard of  the  coin  was,  ^3  175.  io)4d.  per  ounce. 

2.  That  the  market  price  of  gold  bullion  was  then  ^4  los. 
per  ounce. 

3.  That  the  foreign  exchanges  had  fallen  to  an  enormous 
extent :  that  with  Hamburg,  nine  per  cent.,  that  with  Paris 
14  per  cent. 

4.  That  the  increase  of  bank-notes  had  been  very  great 
during  the  last  few  years,  and  was  rapidly  augmenting. 

5.  That  specie  had  disappeared  from  circulation. 

The  report  made  by  the  committee  was  divided  into  four 
parts,  the  first  dealing  with  the  causes  of  the  high  price  of 
gold  ;  the  second,  with  the  state  of  the  foreign  exchanges 
and  the  reason  why  they  were  adverse  to  England  ;  the  third, 
with  the  conduct  of  the  Bank  of  England  in  the  regulation 
of  its  note  issues  ;  and  the  fourth,  the  increase  in  circulation 
of  the  Bank  of  England  and  of  the  country  banks  and  the 
increase  of  their  discounts. 

The  demonstration  was  easy  to  intelligent  and  unprejudiced 
observers  that  the  high  price  of  gold  was  the  measure  of  the 
depreciation  of  the  bank  paper.  The  contention  of  some  of 
those  who  declared  that  bank  paper  had  not  depreciated,  but 
that  gold  had  risen  in  value  because  of  its  scarcity,  grew  out 
of  a  muddy  confusion  of  ideas  regarding  the  relations  of 
prices  to  the  two  standards  of  gold  and  paper.  The  com- 
mittee showed  that  the  question  of  prices  had  no  relation  to 
the  difference  between  the  mint  price  and  the  market  price 
of  gold.  The  paragraph  in  which  they  made  this  clear  is 
as  follows : 


An  ounce  of  standard  gold  bullion  will  not  fetch  more  in  our 
market  than  ^3  175.  lo^d.,  unless  ^"3  ijs.  ioj4d-,  in  our  actual  cur- 
rency is  equivalent  to  less  than  an  ounce  of  gold.  An  increase  or 
diminution  in  the  demand  for  gold,  or  what  comes  to  the  same  thing, 
a  diminution  or  increase  in  the  general  supply  of  gold,  will,  no  doubt, 
have  a  material  effect  upon  the  money  prices  of  all  other  articles. 
An  increased  demand  for  gold,  and  a  consequent  scarcity  of  that 
article,  will  make  it  more  valuable  in  proportion  to  all  other  articles  ; 
the  same  quantity  of  gold  will  purchase  a  greater  quantity  of  any 


SECOND   CENTURY  OF  THE  BANK   OF  ENGLAND.    IO/ 

other  article  than  it  did  before  ;  in  other  words,  the  real  price  of  gold, 
or  the  quantity  of  commodities  given  in  exchange  for  it,  will  rise,  and 
the  money  prices  of  all  commodities  will  fall ;  the  money  price  of 
gold  itself  will  remain  unaltered,  but  the  prices  of  all  other  commodi- 
ties will  fall.  That  this  is  not  the  present  state  of  things  is  abun- 
dantly manifest ;  the  prices  of  all  commodities  have  risen  and  gold 
appears  to  have  risen  in  its  price  only  in  common  with  them. 

Another  proof  that  it  was  not  the  scarcity  of  gold,  but  the 
depreciation  of  paper,  which  increased  the  market  price  of 
gold  in  paper  was  the  fact  ' '  that  both  at  IJamburg  and 
Amsterdam,  where  the  measure  of  value  is  not  gold  as  in 
this  country,  but  silver,  an  unusual  demand  for  gold  would 
affect  its  money  price,  that  is,  its  price  in  silver  ;  and  that 
as  it  does  not  appear  that  there  has  been  any  considerable  rise 
in  the  price  of  gold,  as  valued  in  silver,  at  those  places  in 
the  last  year,  the  inference  is,  that  there  was  not  any  consid- 
erable increase  in  the  demand  for  gold."  The  committee 
also  called  attention  to  the  fact  that  on  previous  occasions 
4 '  the  excess  of  the  market  price  of  gold  above  its  mint  price 
was  found  to  be  owing  to  the  bad  state  of  the  currency  ; 
and  in  both  instances,  the  reformation  of  the  currency  effectu- 
ally lowered  the  market  price  of  gold  to  the  level  of  the  mint 
price."  By  parity  of  reasoning,  the  reformation  of  the  ex- 
isting paper  currency  would  lower  the  price  of  gold  to  the 
level  of  the  mint  price,  without  regard  to  the  quantity  of 
commodities  which  either  form  of  currency  might  purchase. 

The  high  rate  of  exchange  against  England,  as  expressed 
in  paper  currency,  was  explained  by  some  of  the  witnesses 
as  being  due  to  a  large  balance  of  payment  due  from  Eng- 
land to  other  countries,  either  on  account  of  imports  of 
merchandise  or  expenditures  abroad  on  account  of  military 
supplies  and  subsidies.  The  committee,  however,  pointed 
out  that  it  had  ' '  been  long  settled  and  understood  as  a  prin- 
ciple, that  the  difference  of  exchange  resulting  from  the 
state  of  trade  and  payments  between  two  countries  is  limited 
by  the  expense  of  conveying  and  insuring  the  precious 
metals  from  one  country  to  the  other  ;  at  least,  that  it 
cannot  for  any  considerable  length  of  time  exceed  that  limit. 


108  HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

The  real  difference  of  exchange,  resulting  from  the  state  of 
trade  and  payments,  never  can  fall  lower  than  the  amount 
of  such  expense  of  carriage,  including  the  insurance."  If 
proof  were  needed  of  this  simple  proposition,  it  was  fur- 
nished by  the  answers  given  to  the  searching  questions  of 
the  committee  by  Mr.  Greffulhe,  regarding  the  actual  rate 
of  exchange  in  coin.  "  From  these  answers  of  Mr.  Greffulhe, 
it  appears, ' '  said  the  committee,  ' '  that  when  the  computed 
exchange  with  Hamburg  was  29,  that  is,  from  16  to  17  per 
cent,  below  par,  the  real  difference  of  exchange,  resulting 
from  the  state  of  trade  and  balance  of  payments,  was  no 
more  than  five  and  a  half  per  cent,  against  this  country." 
The  committee  concluded,  therefore,  that  after  making  the 
necessary  allowances  for  the  balance  of  trade  and  payments, 
there  still  remained  a  fall  of  n  per  cent,  in  the  exchange  with 
Hamburg  "  to  be  explained  in  some  other  manner." 

Mr.  Harman,  one  of  the  directors  of  the  bank,  declared 
before  the  committee,  ' '  I  must  very  materially  alter  my 
opinions  before  I  can  suppose  that  the  exchanges  will  be 
influenced  by  any  modification  of  our  paper  currency."  The 
committee  furnished  him  in  their  report  the  evidence  of 
the  depreciation  of  the  Scotch  currency,  when  the  optional 
clause  of  payment  was  inserted  after  the  Seven  Years'  War  ; 
the  depreciation  of  Irish  currency  six  }^ears  before  ;  and  the 
depreciation  of  the  notes  of  the  Bank  of  England  itself  three 
years  after  its  foundation.  The  committee  then  declared  : 

Under  the  former  system,  when  the  bank  was  bound  to  answer  its 
notes  in  specie  upon  demand,  the  state  of  the  foreign  exchanges  and 
the  price  of  gold  did  most  materially  influence  its  conduct  in  the  issue 
of  those  notes,  though  it  was  not  the  practice  of  the  directors  syste- 
matically to  watch  either  the  one  or  the  other.  So  long  as  gold  was 
demandable  for  their  paper,  they  were  speedily  apprised  of  a  depres- 
sion of  the  exchange,  and  a  rise  in  the  price  of  gold,  by  a  run  upon 
them  for  that  article.  If  at  any  time  they  incautious!}'  exceeded  the 
proper  limit  of  their  advances  and  issues,  the  paper  was  quickly 
brought  back  to  them,  by  those  who  were  tempted  to  profit  by  the 
market  price  of  gold  or  by  the  rate  of  exchange.  In  this  manner  the 
evil  soon  cured  itself. 

The  committee,  in   taking  up    the  question  of  excessive 


SECOND    CENTURY  OF  THE  BANK   OF  ENGLAND.    109 

issues,  made  the  discriminating  admission,  "that  the  mere 
numerical  return  of  the  amount  of  bank-notes  out  in  circula- 
tion cannot  be  considered  as  at  all  deciding  the  question 
whether  such  paper  is  or  is  not  excessive.  It  is  necessary 
to  have  recourse  to  other  tests. ' '  The  economy  of  money 
was  referred  to  which  had  taken  place  in  late  years,  by  "  the 
increased  use  of  bankers'  drafts  in  the  common  payments  of 
London  ;  the  contrivance  of  bringing  all  such  drafts  daily  to 
a  common  receptacle,  where  they  are  balanced  against  each 
other  ;  the  intermediate  agency  of  bill-brokers  ;  and  several 
other  changes  in  the  practice  of  London  bankers."  Not- 
withstanding this,  the  committee  found  an  approximate 
increase  between  1808  and  1809  of  ^3, 095, 340  in  country 
bank-notes,  and  about  ;£  1,500,000  in  Bank  of  England  notes. 
The  suspension  of  cash  payments  imposed  no  other  expense 
upon  the  issuers  of  this  paper  than  the  printing  of  the  notes 
and  some  ,£100,000  in  stamp  taxes.  The  committee,  there- 
fore, asserted  their  conclusions,  ' '  That  there  is  at  present 
an  excess  in  the  paper  circulation  of  this  country,  of  which  the 
most  unequivocal  symptom  is  the  very  high  price  of  bullion, 
and  next  to  that,  the  low  state  of  the  Continental  exchanges  ; 
that  this  excess  is  to  be  ascribed  to  the  want  of  a  sufficient 
check  and  control  in  the  issues  of  paper  from  the  Bank  of 
England  ;  and  originally  to  the  suspension  of  cash  payments, . 
which  removed  the  natural  and  true  control." 

The  Bullion  Report  was  presented  by  Mr.  Horner  to  the 
House  on  June  9,  1810,  but  was  not  taken  up  for  considera- 
tion until  May  6,  1811.  The  debate  was  opened  by  Mr. 
Horner,  who  spoke  for  three  hours  and  closed  by  moving  a 
series  of  sixteen  resolutions.  These  resolutions  declared  that 
when  Parliament  passed  the  restriction  act,  it  had  no  inten- 
tion that  the  value  of  the  bank-notes  should  be  altered,  but 
that  they  had  for  a  considerable  time  been  below  their  legal 
value,  and  that  the  extraordinary  depression  of  the  foreign 
exchanges  was  in  great  part  due  to  the  depreciation  of  the 
currency  of  England  relative  to  that  of  other  countries.  The 
final  resolutions  declared  that  the  only  method  of  preserving 
the  paper  currency  at  its  proper  value  was  to  make  it  paya- 


HO          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

ble  on  demand  in  the  legal  coin  of  the  realm,  and  that  cash 
payments  ought  to  be  resumed  at  the  end  of  two  years.  The 
report  was  ably  supported  by  Mr.  Henry  Thornton,  but 
was  assailed  by  Mr.  Rose,  Mr.  Vansittart,  and  others.  Mr. 
Vansittart  maintained  that  ' '  a  standard  in  the  sense  used  by 
these  gentlemen,  namely,  a  fixed  and  invariable  weight  of 
the  precious  metals  as  a  measure  of  value,  never  existed  in 
this  country."  His  idea  was  that  the  pound  sterling  was  a 
sort  of  intangible  thing,  and  that  the  paper  pound  was  not 
to  be  considered  as  depreciated  so  long  as  it  formed  the  cur- 
rent medium  of  exchange,  and  was  accepted  in  the  discharge 
of  obligations.  The  effort  was  made  by  the  defenders  of 
paper  money  to  deny  any  difference  between  gold  prices  and 
paper  prices,  but  it  was  disclosed  in  the  course  of  the  debate 
that  the  government  themselves  were  making  a  distinction 
by  paying  guineas  to  the  soldiers  in  Guernsey  at  the  value 
of  23  shillings,  although  their  legal  value  was  only  21 
shillings. 

The  country  was  not  ready  to  return  to  a  specie  basis,  and 
Mr.  Horner's  first  resolution  was  defeated  by  a  vote  of  75 
in  the  affirmative  to  151  in  the  negative,  and  his  final  reso- 
lution by  a  vote  of  45  to  180.  Mr.  Vansittart  followed  up 
his  victory  by  a  series  of  resolutions,  to  the  effect  "  That  the 
promissory  notes  of  the  Bank  of  Kngland  have  hitherto 
been,  and  are  at  this  time  held  to  be,  equivalent  to  the  legal 
coin  of  the  realm,"  and  that  the  price  of  bullion  and  the 
state  of  the  foreign  exchanges  were  in  no  way  due  to  exces- 
sive issues  of  bank  paper.  Notwithstanding  the  protests  of 
the  better  informed  members  of  the  House,  an  amendment 
by  Mr.  Canning  was  rejected,  42  to  82,  and  Mr.  'Vansittart's 
astounding  resolutions  were  carried. 

The  opponents  of  the  Bullion  Report  laid  stress  upon  the 
fact  that  gold  was  not  sold  openly  at  a  premium.  The  rea- 
son was  the  belief  that  it  was  a  penal  offence  to  part  with  a 
bank-note  for  less  than  its  face  value  in  bullion,  and  at  the 
very  moment  of  the  debate  on  Mr.  Horner's  report  three 
men  were  lying  in  prison  for  selling  guineas  for  more  than 
twenty-one  shillings  under  an  old  statute  of  Edward  VI. 


SECOND   CENTURY  OF  THE  BANK  OF  ENGLAND.    Ill 

The  issue  soon  after  came  before  the  Court  of  Common  Pleas 
and  they  unanimously  quashed  a  conviction  under  the  law 
and  declared  that  it  was  no  crime  to  sell  guineas  at  a  pre- 
mium. Lord  King  in  March,  1811,  issued  a  circular  to  sev- 
eral of  his  tenants,  reminding  them  that  their  contract  was 
to  pay  a  certain  quantity  of  the  legal  coin  of  the  country,  and 
that,  as  the  paper  currency  was  considerably  depreciated,  he 
should  in  future  require  his  rents  to  be  paid  in  the  legal  coin 
of  the  realm,  in  Portugese  coin  of  equal  weight,  or  by  a  suffi- 
cient amount  of  bank-notes  to  purchase  the  necessary  weight 
of  standard  gold.  This  attempt  to  establish  a  gold  price 
distinct  from  the  paper  price  of  commodities  caused  a  tem- 
pest of  rage  among  the  advocates  of  a  paper  currency  and 
led  to  the  charge  againt  Lord  King,  so  much  bandied  about 
in  France,  of  incivism.  A  bill  was  promptly  introduced  into 
Parliament  by  Lord  Stanhope,  making  it  a  misdemeanor  to 
make  any  difference  in  payments  between  guineas  and  bank- 
notes. The  measure  passed  the  House  of  Lords  by  a  vote 
of  43  to  1 6,  and  the  House  of  Commons  by  a  vote  of  95  to  20. 
The  disasters  to  the  country  banks  during  1815  and  1816 
greatly  reduced  the  volume  of  paper  afloat  and  made  way 
for  additional  issues  by  the  Bank  of  England.  The  reduc- 
tion in  country  bank  paper  in  circulation  is  estimated  by 
Professor  MacLeod  l  at  three  times  the  amount  of  the  issue 
of  the  Bank  of  England,  and  the  effect  was  immediate!)'  felt 
in  the  rise  in  value  of  Bank  of  England  notes.  The  market 
price  of  gold  in  paper  fell  from  ^5  6.?.,  in  May,  1815,  to  ^3 
iSs.  6^.,  or  within  three  per  cent,  of  par,  in  October,  1816. 
Foreign  exchange  rose  in  a  corresponding  degree,  and  these 
rates  prevailed  until  the  mid-summer  of  1817.  The  bank 
had  been  preparing  during  the  peace  in  1815  to  resume 
specie  payments  and  were  able  after  the  final  overthrow  of 
Napoleon  to  announce,  in  November,  1816,  that  they  would 
pay  all  notes  dated  previous  to  January  i,  1812,  and  that  in 
the  following  April  they  would  pay  all  notes  dated  before 
January  i,  1816.  Resumption  was  thus  almost  accomplished 


1  Theory  and  Practice  of  Banking,  II.,  62. 


112          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

and  the  people  were  found  to  be  so  accustomed  to  a  paper 
currency  that  little  demand  was  made  for  gold  and  many 
persons  who  had  hoarded  gold  presented  it  for  exchange  in 
bank-notes. 

Cash  payments  were  not  yet  established  by  law,  however, 
and  the  restriction  had  been  continued,  after  Napoleon's 
return  from  Elba,  until  July,  1818.  The  return  of  peace 
brought  a  great  many  foreign  borrowers  to  England. 
Prussia,  Austria,  and  other  states  were  endeavoring  to  ob- 
tain gold  to  reform  their  currencies.  The  result  was  a 
heavy  drain  upon  the  gold  reserve,  which  had  reached 
^11,914,000  in  October,  1817,  and  the  reappearance  of  a 
premium  upon  coin  and  bullion.1  Advances  to  the  govern- 
ment were  increased  from  ^20,000,000  to  ^28,000,000  and 
the  bank  made  no  effort  to  restrict  their  issues,  in  the  face 
of  the  foreign  drain  and  a  new  increase  in  the  circulation  of 
the  country  banks.  It  was  perfectly  evident  that  specie 
payments  could  not  long  be  maintained  with  the  paper  price 
of  gold  at  ^4  35.,  or  about  seven  per  cent,  premium,  and 
committees  were  appointed  on  February  3,  1819,  by  both 
houses  of  Parliament  to  inquire  into  the  state  of  the  bank. 
They  reported  in  favor  of  a  further  suspension  of  specie 
payments  and  a  bill  for  the  purpose  became  law  on  April 


1  The  question  was  much  discussed  by  t  _e  oithodox  believers  of 
the  classical  school  of  political  economy,  wliy  prices  of  commodities 
did  not  fall  with  the  export  of  gold  and  invite  foreign  purchasers  of 
English  merchandise.  As  Prof.  Sumner  puts  it  (History  of  American 
Currency,  264),  "  If  all  nations  used  specie,  or  even  paper  and  specie, 
in  only  due  proportion  it  would  be  as  impossible  for  one  nation  to  be 
drained  of  specie  as  for  New  York  harbor  to  be  drained  of  water  by 
the  tide."  But  all  nations  do  not  use  specie  only,  but  credit,  and 
modern  experience  has  demonstrated  that  prices  do  not  move  up  and 
down  with  gold  exports  and  imports,  but  under  the  operation  of 
much  wider  causes  in  the  credit  market.  The  Bank-  of  England  did 
not  employ  at  this  time  the  method  of  protecting  its  cash  by  raising 
the  rate  of  discount,  and  the  orthodox  theory  of  price  movements  was 
of  no  practical  avail  against  the  operation  of  special  causes  which 
drew  off  gold.  See  an  outline  of  the  discussion  in  Money,  by  Francis 
A.  Walker,  356-58. 


SECOND   CENTURY  OF  THE  BANK  OF  ENGLAND.    113 

5th.  The  bill  forbade  the  bank  to  make  payments  in  gold 
either  for  fractional  sums  or  for  any  of  their  notes  during  the 
session  of  Parliament.  The  committees  then  addressed 
themselves  to  a  full  hearing  regarding  the  bank  manage- 
ment and  the  best  means  of  resuming  specie  payments  upon 
a  secure  basis. 

The  testimony  taken  by  the  committees  indicated  a 
marked  advance  in  sound  opinion  among  bankers  and  busi- 
ness men  since  the  adoption  of  the  comic  resolutions  of  Mr. 
Vansittart.  Nearly  all  the  witnesses  admitted  the  influence 
of  the  irredeemable  circulation  upon  the  foreign  exchanges 
and  the  necessity  of  curtailing  the  circulation  when  the  ex- 
changes became  unfavorable  and  the  automatic  regulation 
of  redemption  in  coin  on  demand  was  lacking.  The  majority 
of  the  bank  directors  were  not  convinced  of  the  wisdom  of 
these  views  until  several  years  later,  but  Sir  Robert  Peel 
changed  his  opinion  completely  and  found  a  powerful  sup- 
porter in  Lord  Grenville,  who  was  a  member  of  -the  Cabinet 
which  originally  proposed  the  restriction  act.  Lord  Gren- 
ville went  so  far  as  to  declare  that  he  considered  the  restric- 
tion one  of  the  greatest  calamities  under  which  the  country 
labored  and  to  deplore  the  part  which  he  had  himself  taken 
when  it  was  proposed.  While  the  bank  was  enabled  by  the 
act  to  lend  money  with  one  hand,  he  declared,  it  was  with 
the  other  shaking  the  foundation  of  contracts,  affecting 
prices,  and  involving  the  country  in  distress  and  individuals 
in  ruin  ten  times  greater  than  any  benefits  they  could  derive 
from  liberal  issues. 

Both  houses  concurred  in  the  passage  of  a  bill  for  the 
gradual  resumption  of  specie  payments  by  the  reduction  of 
the  mint  price  of  gold.  It  was  provided  that  after  February 
i,  1820,  the  bank  should  be  required  to  deliver  gold  of  stand- 
ard fineness  in  quantities  of  not  less  than  sixty  ounces  at  ^4 
is.  per  ounce  ;  that  after  October  i,  1820,  the  rate  should  be 
reduced  to  ^3  195.  6d.,  and  after  May  i,  1821,  to  the  mint 
price  of  ,£3  175.  io%d.  per  ounce.  The  provision  for  pay- 
ment in  bullion  was  adopted  so  as  to  prevent  a  run  upon  the 
bank  for  coin  by  small  note-holders,  while  it  established 


114          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

substantial  coin  redemption  when  the  bullion  came  to  be 
delivered  at  the  mint  price.1  This  liability  to  pay  in  bullion 
was  to  continue  until  May  i,  1823,  after  which  full  redemp- 
tion in  coin  on  demand  was  to  be  required.  The  statutes 
restricting  the  trade  in  gold  coin  and  bullion  were  repealed 
and  Mr.  Pitt's  practice  of  free  borrowing  from  the  bank  was 
cut  off  by  an  act  forbidding  advances  of  any  description 
without  the  express  authority  of  Parliament.  It  is  probable 
that  the  bank  would  have  been  able  to  resume  cash  payments 
without  authority  of  legislation,  within  the  time  which  the 
act  required,  but  its  passage  by  Parliament  did  much  to 
educate  and  crystallize  public  opinion  and  to  protect  the 
bank  during  the  attacks  upon  the  resumption  act  which  were 
made  within  the  next  few  years. 

The  accumulation  of  gold  in  the  Bank  of  England  was  so 
rapid  that  it  became  possible  to  pass  an  act  in  1821  permit- 
ting full  resumption  on  May  i,  1821.  The  government 
repaid  ^"10,000,000  of  its  obligations  to  the  bank  and  specie 
payments  were  resumed  in  coin  at  the  date  fixed  by  law. 
The  bad  harvests  and  commercial  collapse  led  to  several 
attacks  upon  the  resumption  act  in  Parliament  in  1822  and 
1823,  but  they  were  rejected  by  large  majorities.  It  was 
pointed  out  in  the  course  of  the  debate  that  the  low  price 
of  wheat,  which  was  a  great  cause  of  discontent  among  the 
agricultural  class,  could  not  well  be  due  to  the  alleged  con- 
traction of  the  currency,  for  a  greater  decline  had  taken 
place  in  France,  which  had  been  steadily  upon  a  metallic 
basis,  and  a  like  decline  in  other  Continental  countries  where 
depreciated  paper  was  still  the  medium  of  circulation.  The 
price  of  wheat  at  Vienna,  in  spite  of  the  large  volume  of  the 
Austrian  paper  currency,  had  dropped  from  1145.  in  March 
1817,  to  195.  6d.,  in  September,  1819.  It  was  shown  also 
that  the  amount  of  currency  in  England  had  increased  rather 
than  diminished,  for  the  paper  issues  had  not  been  materially 
reduced  and  a  large  mass  of  coin  had  been  infused  into  the 
circulation.  The  only  concession  obtained  by  the  opponents 

1  Levi,  137. 


SECOND   CENTURY  OF  THE  BANK  OF  ENGLAND.    11$ 

of  resumption  was  the  statute  of  1822  (Chapter  70),  author- 
izing country  bankers  to  continue  the  issue  of  notes  for  £i 
until  the  expiration  of  the  charter  of  the  Bank  of  England 
in  1833.  The  permission  to  issue  £i  notes,  which  had  been 
given  to  the  Bank  of  England  in  1797  and  continued  during 
the  entire  period  of  restriction,  was  withdrawn  by  the 
resumption  acts. 

The  effect  of  the  monopoly  of  the  Bank  of  England, 
which  deprived  any  corporation  or  large  firm  of  the  power  to 
issue  notes,  but  left  the  power  to  firms  of  six  persons  or  less, 
was  the  subject  of  severe  criticism  every  time  that  the  small 
country  banks  were  swept  away  in  a  period  of  industrial 
depression.  The  success  of  the  Scotch  banking  system  was 
attracting  attention  and  English  financiers  were  desirous  of 
adopting  it  in  England.  It  was  supposed,  however,  down 
to  1823,  that  no  joint  stock  bank  cpuld  be  lawfully  established 
in  England  because  of  the  exclusive  privileges  conferred 
upon  the  Bank  of  England  by  the  Act  of  1742.  It  was 
found,  upon  careful  inspection  of  the  act,  and  having  in 
view  the  rule  of  law  that  a  penal  statute  must  be  construed 
strictly,  that  the  restrictions  were  limited  in  their  application 
to  banks  of  issue.  The  failure  to  make  any  distinction  up 
to  this  time  between  the  power  to  establish  joint  stock  banks 
for  the  purpose  of  issuing  notes  and  the  power  to  establish 
them  for  other  purposes  was  due  to  the  early  impression  that 
banking  could  not  be  carried  on  without  the  issue  of  notes. 
The  London  private  bankers  had  for  thirty  years  suspended 
the  use  of  circulating  promissory  notes,  but  the  tradition 
lingered  that  joint  stock  banks  could  not  be  established  with- 
out infringing  the  legal  monopoly  of  the  Bank  of  England. 
Mr.  Joplin  in  a  pamphlet  issued  in  1823  announced  his  dis- 
covery that  the  charter  of  the  bank  "  does  not  prevent  pub- 
lic banks  for  the  deposit  of  capital  from  being  established."  * 

There  was  natural  hesitation,  even  after  this  discovery,  to 
embark  in  joint  stock  banks  of  deposit  without  specific 
authority  of  law,  but  the  discovery  probably  had  something 


1  MacLeod,  Theory  and  Practice  of  Banking,  II.,  381. 


Il6          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

to  do  with  wringing  concessions  from  the  Bank  of  England 
and  improving  the  existing  system.  The  government  pro- 
posed to  the  bank  in  1823  that  it  consent  to  the  creation  of 
joint  stock  banks  of  issue  at  a  distance  of  sixty-five  miles 
from  London,  upon  condition  of  the  extension  of  the  bank 
charter  for  ten  years.  This  proposition  was  rejected,  but 
the  subject  was  revived  after  the  dreadful  panic  of  1825. 
The  time  for  the  renewal  of  the  charter  wras  drawing  nearer 
and  the  bank  consented  to  the  Act  of  1826,  establishing 
joint  stock  banks  of  issue  beyond  the  radius  of  sixty-five 
miles  from  London  and  requiring  the  bank  to  establish 
branches.  These  joint  stock  banks  were  authorized  to  issue 
notes,  but  they  were  not  to  issue  them  within  the  prescribed 
distance  nor  to  draw  upon  their  London  agents  any  bill  of 
exchange  payable  on  demand  or  for  any  less  sum  than  ^50. 
A  sworn  list  of  the  shareholders  and  places  for  carrying  on 
business  was  required  of  the  new  banking  companies,  but 
few  restrictions  were  imposed  as  to  their  management,  capital, 
or  cash  reserve. 

Few  joint  stock  banks  were  formed  for  the  first  few  years 
after  the  Act  of  1826,  as  the  leading  country  bankers  already 
had  private  banks  and  had  no  wish  to  set  up  powerful  rivals. 
The  Bank  of  England  managers  clung  to  the  monopoly  of 
banking  in  London,  even  after  they  had  conceded  freedom 
beyond  the  sixty-five  mile  radius,  and  begged  Lord  Althorp, 
when  the  charter  was  renewed  in  1833,  to  insert  a  clause 
clearly  preventing  the  formation  of  joint  stock  banks  in  the 
City.  Lord  Althorp,  having  obtained  the  opinion  of  the 
law  officers  of  the  Crown,  in  favor  of  the  right  to  set  up  de- 
posit banks,  refused  to  impose  new  restrictions  and  tartly 
reminded  the  directors  of  the  bank  that  the  bargain  was  that 
their  privileges  should  remain  as  they  were, — not  that  they 
should  be  extended.1  A  clause  was  inserted  in  the  Act  of 
1833,  specifically  declaring  that  any  body  politic  or  corporate 
or  partnership  might  carry  on  the  business  of  banking  in 
London  or  within  sixty-five  miles  thereof,  provided  they  did 


1  MacLeod,  Theory  and  Practice  of  Banking,  II.,  384. 


SECOND    CENTURY  OF  THE  BANK  OF  ENGLAND.    II? 

not  issue  notes  payable  on  demand.  It  was  not  until  after 
this  act  that  it  was  seriously  attempted  to  set  up  a  joint 
stock  bank  in  London.  The  history  of  these  banks  is  not  a 
part  of  the  history  of  banks  of  issue,  but  it  is  an  interesting 
fact  that  the  first  was  the  London  and  Westminster  Bank, 
which  was  originally  formed  as  a  private  partnership  and 
whose  manager  was  Mr.  James  W.  Gilbart,  the  author  of 
one  of  the  most  complete  and  intelligent  works  on  English 
banking.  Joint  stock  banks  of  issue  were  formed  in  con- 
siderable numbers  in  the  prosperous  years  preceding  the 
panic  of  1836,  and  more  than  forty  were  established  in  the 
spring  of  the  latter  year.  The  number  issuing  notes  when 
the  restrictive  Act  of  1844  took  effect  was  72,  of  which  only 
35  still  retain  the  privilege. 

The  Bank  of  England  opened  its  first  branches  at  Glou- 
cester, Manchester,  and  Swansea.  The  branches  were  able  to 
compete  on  favorable  terms  wTith  the  country  banks  and  to  > 
discount  bills  at  four  per  cent.,  where  the  old  banks  charged 
five  per  cent,  and  sometimes  an  additional  commission. 
The  principal  advantage  which  the  country  bankers  re- 
tained was  the  payment  of  interest  on  deposits,  but  they 
felt  keenly  the  competition  of  the  branch  banks  and  held 
a  meeting  as  early  as  December  7,  1826,  to  consider  it. 
They  adopted  resolutions  that  the  establishment  of  branch 
banks  ' '  have  the  evident  tendency  to  subvert  the  general 
banking  system  that  has  long  existed  throughout  the  coun- 
try, and  which  has  grown  up  with,  and  been  adapted  to,  the 
wants  and  conveniences  of  the  public. ' '  A  deputation  was 
sent  to  the  Chancellor  of  the  Exchequer,  who  promised  to 
give  serious  consideration  to  their  views.  Further  cause  of 
complaint  was  found  in  the  stamp  duties,  which  were  levied 
upon  the  country  bank-notes  according  to  value,  while  a 
fixed  sum  was  accepted  from  the  Bank  of  England  for  their 
entire  issues.  The  result,  according  to  the  country  bankers, 
was  to  subject  them  to  a  tax  of  ^650  on  ;£  10,000  where  the 
bank  paid  only  ^35.  This  protest  resulted  in  an  act  ex- 
tending the  privileges  of  the  Bank  of  England  to  the  coun- 
try banks,  but  the  general  protests  against  the  branches  were 


Il8          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

answered  by  the  assurance  that  "  the  interest  of  the  country 
bankers  should  not  be  neglected  in  any  negotiation  between 
the  government  and  the  Bank  of  England  for  the  renewal  of 
the  bank  charter. ' '  1 

The  extension  of  the  country  banks,  without  any  legal 
regulation,  was  popularly  regarded  as  one  of  the  causes  of 
the  panic  of  1825  as  well  as  of  some  of  the  earlier  panics. 
The  issue  of  small  notes  by  the  country  banks  was  treated 
by  eminent  statesmen  as  an  especially  dangerous  feature  of 
country  banking  and  as  having  a  tendency  to  expel  coin 
from  the  circulation.  Many  of  these  notes  were  retired  by 
the  insolvency  of  the  issuers  in  the  panic  of  1825  and  the 
ministry  seized  the  opportunity  to  propose  their  prohibition 
for  the  future.  They  took  steps,  without  waiting  for  Parlia- 
ment to  act,  to  prohibit  the  issue  of  the  required  stamps  for 
£i  and  £2  notes  and  the  Chancellor  of  the  Exchequer  made 
an  early  motion  in  Parliament  that  no  notes  be  issued  in  the 
future  under  ^5.  The  proposition  became  law  and  after  a 
sharp  contest  was  extended  in  1828  to  Scotch  notes  circula- 
ting in  England.2 

The  approach  of  the  date  fixed  for  the  expiration  of  the 
bank  charter, — at  the  end  of  one  year's  notice  after  August 
i,  1833, — ^d  to  the  appointment  of  a  committee  of  the  House 
of  Commons  May  22,  1832,  to  consider  the  privileges  to  be 
granted  in  the  extended  charter.  The  witnesses  examined 
discussed  the  propriety  of  establishing  joint  stock  banks  in 
Condon  (which  most  of  them  opposed),  the  publications  of 
the  accounts  of  the  bank,  the  regulation  of  the  circulation, 
and  the  rate  of  discount.  The  subject  of  making  the  bank- 
notes legal  tender  except  at  the  bank  was  also  considered 
and  the  change  was  urged  upon  the  ground  that  the  notes 
could  then  be  used  by  the  country  banks  in  the  redemption 
of  their  own  notes  in  times  of  panic  and  the  demand  for 
gold  diminished.  Lord  Althorp  moved  the  resolutions  for 

1  Gilbart,  I.,  70-73. 

2  The  history  of  Scotch  and  Irish  banking  will  show  that  the  effort 
made  at  this  time,  to  deprive  those  countries  of  the  use  of  small 
notes,  was  defeated. 


SECOND   CENTURY  OF  THE  BANK  OF  ENGLAND.    119 

the  renewal  of  the  charter  on  May  31,  1833,  and  it  was  de- 
cided by  a  vote  of  316  to  83  to  proceed  with  their  considera- 
tion. The  proposition  to  make  the  notes  legal  tender  except 
at  the  bank  prevailed  by  a  vote  of  214  to  156. 

The  new  charter  continued  the  exclusive  privilege  of  note 
issue  within  sixty-five  miles  of  London,  but  authorized 
country  banks  to  have  agencies  in  London  for  the  purpose 
of  paying  such  of  their  notes  as  might  be  presented.  The 
bank  was  authorized  to  reduce  its  capital  by  one-fourth  of 
the  amount  of  the  debt  of  the  public  to  the  bank  and  in 
consideration  of  its  privileges  surrendered  ,£120,000  of  the 
amount  allowed  annually  by  the  government  for  the  man- 
agement of  the  debt.1  The  charter  of  the  bank  was  ex- 
tended to  one  years'  notice,  to  be  given  within  six  months 
after  the  expiration  of  ten  years  from  August  i,  1834,  and 
until  repayment  of  all  debts  due  by  Parliament  to  the  bank. 
The  renewal  of  the  charter  in  1844  extended  the  life  of  the 
bank  until  twelve  months'  notice  after  August  i,  1855,  and 
the  repayment  of  the  public  debt.  No  such  notice  was 
given  and  the  bank  continued  to  operate  under  this  author- 
ity until  1870.  A  revision  was  made  at  that  time  of*  the 
statutes  relating  to  the  public  debt,  and  it  was  enacted  that 
the  Bank  of  England  shall  continue  a  corporation  until  all 
the  public  funds  are  duly  redeemed  by  Parliament.2 

The  period  following  the  crisis  of  1839  developed  a  pecul-\ 
iar  doctrine  of  finance  in  England,  which  obtained  a  strong 
footing  among  public  men  with  only  a  rudimentary  know- 
ledge of  political  economy  and  has  spread  to  some  extent 
on  the  Continent  of  Europe  and  in  the  United  States.     This 

1  The  government  repaid  one-fourth  of  the  permanent  debt,  amount- 
ing to  ^3,671,000,   and  reducing  the  principal  to  ^11,015,100  ;  but 
the  bank  never  availed  itself  of  the  permission  to  deduct  the  amount 
from  its  capital,  which  remains  at  ^"14,553,000,  where  it  was  fixed  in 
1816.    The  interest  on  the  debt  to  the  bank  was  reduced  in  1892  from 
three  to  two  and  three-fourths  per  cent.,  and  changes  were  made  in  the 
allowances  for  managing  the  debt  which  made  the  total  saving  to  the 
government  ^"45,700. — London  Bankers'  Magazine ',  July,  1892,  UV., 
50. 

2  Clause  72,  Act  33  and  34  Victoria,  c.  71. 


120          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

doctrine  embodies  the  ideas  that  bank-notes  are  a  form  of 
currency  entirely  distinct  from  other  commercial  paper  and 
forms  of  credit  ;  that  an  expansion  of  bank-note  issues,  even 
when  redeemable  in  coin  on  demand,  is  a  potent  cause  of 
commercial  crises  ;  and  that  the  way  to  prevent  crises  is  to 
place  fixed  limits  upon  bank-note  issues.  Few  advocates  of 
this  theory  have  undertaken  to  place  definite  limits  upon  the 
volume  of  bills  of  exchange  or  of  other  forms  of  commercial 
paper  issued  by  solvent  borrowers,  but  they  have  maintained 
that  bank-notes  were  money  for  all  practical  purposes  of 
daily  use  ;  that  an  undue  expansion  in  the  volume  of  money 
has  stimulated  speculation  and  expelled  gold  under  the  opera- 
tion of  Gresham's  law;  and  that  the  curtailment  of  note 
issues  would  maintain  sobriety  in  the  mercantile  world  and 
restore  the  equilibrium  of  the  foreign  exchanges. 

The  advocates  of  this  view,  of  whom  the  most  conspicu- 
ous were  Sir  Robert  Peel,  Lord  Overstone,  and  Colonel  Tor- 
rens,  named  their  new  discovery  "  The  currency  principle," 
and  immediately  set  out  to  rescue  the  commercial  world  of 
Great  Britain  from  future  disturbance  by  enforcing  their 
policy  in  a  modified  form  upon  the  Bank  of  England.  Sir 
Robert  Peel  declared,  in  advocating  the  resumption  act  of 
1819,  that  it  was  impossible  to  prescribe  any  specific  limita- 
tion of  issue  for  the  bank  and  that  the  quantity  of  circula- 
tion which  was  demanded  in  a  time  of  confidence  varied 
materially  from  the  amount  required  in  a  period  of  despon- 
dency. He  became  a  complete  convert  to  the  currency 
principle  in  1844  and  introduced  the  bill  which  became  the 
basis  of  the  present  charter  of  the  Bank  of  England.  The 
theory  of  the  currency  principle  was  so  generally  accepted 
as  a  means  of  putting  an  end  to  panics  that  amendment  was 
refused  by  the  House  of  Commons  by  a  vote  of  185  to  30, 
and  the  bill  passed  the  House  of  Lords  without  a  division, 
and  received  the  royal  assent  on  July  19,  1844.  The  bill 
absolutely  cut  off  the  creation  of  banks  of  issue,  except  by 
the  union  of  existing  banks,  and  made  the  future  elasticity  of 
English  currency  dependent  upon  deposits  of  coin  or  bullion 
with  the  Bank  of  England. 


SECOND   CENTURY  OF  THE  BANK   OF  ENGLAND.    121 

The  new  charter  provided  for  the  separation  of  the  issue 
department  from  the  banking  department  of  the  Bank  of 
England  and  placed  the  issue  department  under  the  charge 
of  a  committee  of  the  directors  appointed  by  the  entire  body. 
The  Governor  was  directed  to  transfer  to  the  issue  depart- 
ment on  August  31,  1844,  securities  to  the  value  of  ,£14,- 
000,000,  of  which  the  debt  due  by  the  government  to  the 
bank  was  to  be  a  part.  The  bank  was  also  to  deliver  to  the 
issue  department  such  of  the  gold  coin  and  bullion  as  was 
not  required  for  the  banking  department  and  was  to  receive 
back  a  quantity  of  notes  which  should  make  the  circulation 
of  the  bank  exactly  equal  to  the  coin  and  bullion  on  deposit, 
plus  the  sum  of  ^14,000,000  represented  by  securities.1 
Thenceforth  the  issue  department  was  to  pay  coin  and 
bullion  for  notes  and  issue  notes  for  coin  and  bullion,  and 
no  department  of  the  bank  was  authorized  or  permitted  to 
issue  notes  in  excess  of  the  limits  thus  established.  The 
price  of  gold  at  the  bank  was  fixed  for  the  future  at  ^3  17.?. 
gd.  per  ounce.  Weekly  accounts  of  the  circulation  were  to 
be  transmitted  to  the  government  and  published  in  the  Lon- 
don Gazette.  The  bank  was  required  to  pay  ,£180,000  annu- 
ally for  its  privileges  instead  of  the  rate  of  ^120,000  fixed  in 
1833.  This  payment  was  modified  in  1861  and  now  amounts 
to  about  ,£200,000. 

The  purpose  of  fixing  the  amount  of  notes  covered  by  se- 
curities at  ^14,000,000  was  to  economize  that  amount  of 
gold  without  impairing  the  convertibility  of  the  note.  The 
amount  was  arrived  at,  not  with  any  special  regard  to  the 
capital  of  the  bank  or  the  government  debt  already  held,  but 
with  regard  to  the  smallest  amount  of  Bank  of  Kngland 


1  Whether  the  notes  constitute  a  prior  lien  on  the  securities  and 
bullion  in  the  issue  department  is  a  point  which  is  not  clearly  set 
forth  and  has  never  been  judicially  decided.  The  act  directs  that 
"  there  shall  be  transferred,  appropriated,  and  set  apart  by  the  said 
governor  and  company  to  the  issue  department  securities  to  the  value 
of  ^14,000,000"  ;  but  "it  shall  be  lawful  for  them  to  diminish  the 
amount  of  such  securities,"  which  seems  to  preclude  the  idea  that 
they  are  not  part  of  the  general  assets  of  the  bank. — Price,  65. 


122          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

notes  which  could  be  counted  upon  to  remain  always  in  cir- 
culation. It  was  found  that  the  net  circulation  in  Decem- 
ber, 1839,  was  ^14,732,000,  and  it  was  argued  that  at  least 
;£2, 000,000  more  must  be  kept  in  the  banking  reserve  of  the 
bank.  It  was  considered  safe,  therefore,  to  fix  the  uncov- 
ered circulation  at  ^14,000,000  and  it  was  left  to  the  play  of 
the  foreign  exchanges  to  control  the  fluctuations  above  that 
amount.1  Gold  imported  under  the  attraction  of  low  prices 
and  high  interest  rates  would  be  brought  to  the  bank  and 
exchanged  for  notes,  under  the  theory  of  the  framers  of  the 
act,  and  gold  withdrawn  from  the  country  by  the  attraction 
of  low  prices  and  high  interest  rates  elsewhere  would  be 
taken  from  the  bank  by  the  presentation  of  notes,  which 
would  thus  be  withdrawn  from  circulation. 

The  principle  of  issuing  notes  covered  by  other  securities 
than  coin,  within  the  safe  maximum  limit  of  the  amount 
which  can  be  kept  permanently  in  circulation,  is  a  simple 
and  intelligible  banking  principle,  and  indeed  the  principle 
upon  which  modern  banking  is  founded.  The  declared  pur- 
pose of  the  act — "  to  cause  our  mixed  circulation  of  coin 
and  bank-notes  to  expand  and  contract,  as  it  would  have 
expanded  and  contracted  under  similar  circumstances  had  it 
consisted  exclusively  of  coin," — also  seemed  simple  and  in- 
telligible to  those  who  ignored  the  existence  of  credit  and 
the  domestic  causes  which  made  a  larger  circulation  desira- 
ble at  some  periods  than  at  others.  The  Act  of  1844  pro- 
posed substantially  to  destroy  the  bank-note  as  an  instrument 
of  credit  and  make  it  a  mere  certificate  of  coin,  leaving  to 
other  forms  of  commercial  paper  the  functions  which  the 
bank-note  had  in  part  performed.  It  is  obvious,  however, 
that  the  framers  of  the  act,  in  fixing  a  maximum  limit  of 
authorized  circulation,  meant  to  deal  only  with  the  condi- 
tions then  existing  and  that,  if  their  theory  had  proved  op- 
erative, they  could  not  have  objected  to  a  much  higher  limit 
to  meet  the  expanded  volume  of  modern  trade. 

Existing  private  and  joint  stock  banks  of  issue  were  per- 
mitted, with  the  usual  respect  of  English  law  for  vested 

1  Mr.  Torrens,  quoted  by  Hankey,  5-8. 


SECOND   CENTURY  OF  THE  BANK  OF  ENGLAND.    123 

rights,  to  continue  their  outstanding  circulation.  It  was  the 
purpose  and  expectation  that  these  banks  would  gradually 
be  led  to  retire  their  circulation  and  remit  the  power  to  the 
central  bank  of  issue.  Provision  for  this  contingency  was 
made  by  the  authority  given  the  bank  to  increase  the 
amount  of  securities  in  the  issue  department  to  an  amount 
not  exceeding  two-thirds  of  the  country  bank-notes  with- 
drawn and  to  issue  circulation  against  the  new  securities.1 
The  new  issues  did  not  fall  to  the  bank  automatically,  but 
required  an  order  from  the  Crown  in  Council.  The  amount 
of  circulation  allowed  the  country  banks  was  determined  by 
the  average  circulation  during  the  twelve  weeks  preceding 
April  27,  1844,  and  the  amount  was  found  to  be  ,£5,153,417 
for  the  207  private  banks  and  ,£3,478,230  for  the  72  joint 
stock  banks.  It  was  not  until  December  13,  1855,  that  any 
increase  was  made  in  the  secured  circulation  of  the  Bank  of 
England.  Forty-seven  banks  with  aggregate  issues  of 
,£712,623  had  ceased  to  issue  their  notes  since  the  Act  of 
1844  and  an  order  was  made  authorizing  the  increase  of  the 
Bank  of  England  issue  by  ,£475,000.  The  next  increase  was 
,£175,000  in  1861,  and  the  next  £"350,000  in  1866,  increasing 
the  issues  upon  securities  to  £"15,000,000.  An  increase  of 
£"750,000  was  made  April  i,  1881  ;  £"450,000  September  15, 
J887  ;  ,£250,000  February  8,  1889  ;  an^  £35°. °°°  January 
29,  1894.  The  secured  circulation  since  the  latter  date, 
therefore,  has  been  ,£16,800,000  ($84,000,000).  The  lapsed 
issues  since  1844  have  been  ,£2,902,997  on  the  part  of  143 
private  banks,  and  ,£1,504,028  on  the  part  of  37  joint  stock 
banks,  making  a  total  of  £"4,407,025. 

No  provision  was  made  for  strengthening  the  security  of 
the  issues  of  private  banks,  except  the  absolute  limit  put 


1  The  limitation  to  two-thirds  of  the  cancelled  issues  was  based 
upon  the  theory  that  these  issues  had  been  protected  by  one-third 
their  amount  in  bullion,  which  would  be  released  for  circulation, 
thus  keeping  the  amount  of  circulation  intact.  The  utter  disregard 
of  banking  principles  embodied  in  the  law  is  indicated  by  this  as- 
sumption, which  completely  ignores  the  necessity  for  a  reserve 
against  general  liabilities. — Gilbart,  II.,  121. 


124          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

upon  the  amount,  for  it  was  not  intended  to  foster  their 
development.  A  banker  who  ceased  to  issue  his  own  notes 
was  not  permitted  to  resume  the  issue,  and  if  two  or 
more  banks  became  united  and  the  number  of  partners  of 
the  united  bank  exceeded  six  their  power  of  note  issue  was 
to  cease.  The  country  bankers  were  required  to  permit 
their  books  to  be  inspected  by  a  government  officer,  but  this 
was  apparently  to  prevent  an  excess  of  issue  rather  than  to 
afford  any  other  sort  of  security  to  the  public.  The  country 
banks  have  been  slow  to  leave  the  field,  as  the  figures  of 
their  circulation  demonstrate.  Fifty-six  private  banks  were 
still  issuing  ,£2, 220,048  and  35  joint  stock  banks  were  still 
issuing  ,£1,974,202  in  notes  at  the  beginning  of  1896,  more 
than  half  a  century  after  the  beginning  of  the  operation  of 
the  Act  of  1844.  The  notes  of  the  country  banks  were  not 
made  legal  tender  and  the  banks  were  not  required  to  pub- 
lish their  accounts. 

The  operation  of  the  Bank  Act  of  1844  wras  put  to  an  early 
test  by  the  crisis  of  1847  and  the  result  was  a  complete  fail- 
ure upon  two  essential  points.  The  operation  of  the  act 
neither  prevented  the  speculation  which  is  the  cause  of  pan- 
ics, nor  reduced  the  issue  of  notes  to  correspond  with  the 
export  of  gold.  Inquiries  were  made  by  both  the  House  of 
Commons  and  the  House  of  Lords,  at  the  meeting  of  Parlia- 
ment after  the  panic  and  the  friends  of  the  Act  of  1844  made 
an  earnest  effort  to  rescue  it  from  the  discredit  which  the 
panic  had  cast  upon  it.  The  committee  of  the  House  of 
Commons  reported  in  favor  of  continuing  the  act  in  effect, 
but  the  House  of  Lords'  committee  spoke  in  severe  terms  of 
its  operation.  The  failure  of  the  act  in  the  important  re- 
spect of  preventing  commercial  convulsions  was  frankly 
admitted  in  the  debate  in  the  Commons  by  Sir  Robert  Peel. 
It  had  neither  "  put  a  check  on  improvident  speculation," 
in  the  language  of  the  Lords'  committee,  nor  afforded  ' '  se- 
curity against  violent  fluctuations  in  the  value  of  money." 
The  law  was  framed  to  arrest  commercial  expansion  by  limit- 
ing the  means  for  carrying  on  commercial  transactions.  It 
failed  absolutely  in  this  object,  because  such  operations  can 


SECOND   CENTURY  OF  THE  BANK  OF  ENGLAND.    125 


be  carried  on,  and  usually  are  carried  on,  by  other  means 
than  bank-notes.  It  succeeded  in  checking  the  expansion 
only  when  other  forms  of  credit  had  been  swept  away  by 
distrust  and  expansion  of  note  issues  to  fill  their  place  was 
absolutely  needed  to  prevent  overwhelming  commercial  dis- 
aster. It  did  not  prevent  expansion,  in  simple  terms,  when 
expansion  might  do  harm  ;  it  prevented  it  absolutely  when 
it  might  have  done  good. 

It  was  the  theory  of  the  supporters  of  the  act,  that  the 
currency  would  fluctuate  in  exact  accordance  with  the  fluctu- 
ations of  a  metallic  currency  by  the  self-acting  provision  for 
the  issue  of  notes  only  in  exchange  for  gold  and  the  issue  of 
gold  in  exchange  for  notes.  Both  sides  in  the  discussion 
of  the  bill,  when  it  was  pending  in  Parliament,  seem  to  have 
made  the  incredible  blunder  of  overlooking  the  fact  that 
gold  could  be  obtained  by  the  presentation  of  checks.  This 
was  exactly  what  happened  in  1847  an<^  the  effect  upon  the 
outstanding  note  issues  and  the  bullion  in  the  bank  at 
different  dates  during  the  April  pressure  is  indicated  in  the 
following  table  : 


NOTES    HELD     BY    THE 
PUBLIC. 

NOTES    IN    THE    BANK- 
ING  RESERVE. 

BULLION    IN  THE 
BANK. 

Aug.  29,  1846 

Dec.  19,  1846 
Jan.  9,  1847 
Feb.  20,  1847 
Mar.  20,  1847 
Apr.  10,  1847 

^20,426,000 
19,549,000 
2O,837,OOO 
I9,482,OOO 
I9,O69,OOO 
20,243,000 

^9,450,000 
8,864,000 
6,715,000 
5,917,000 
5,419,000 
2,558,000 

^"16,366,000 
15,163,000 
14,308,000 
I2,2I5,OOO 
II,232,OOO 
9,867,000 

The  bank,  therefore,  saw  its  bullion  decreasing  on  the  one 
hand  and  its  banking  reserve  decreasing  on  the  other  hand, 
while  gold  and  notes  poured  out  of  the  banking  department 
in  the  discharge  of  its  obligations.  The  banking  reserve 
was  chiefly  in  notes  which  had  been  obtained  by  the  sur- 
render to  the  issue  department  of  such  gold  as  was  received 
on  deposit,  but  the  payment  of  these  notes  to  customers 
either  swelled  the  note  circulation  or  reduced  the  gold  in  the 
bank,  by  just  the  amount  of  the  payment.  The  effect,  as 
Mr.  John  Stuart  Mill  pointed  out  in  his  testimony  before 


126          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

the  Committee  of  the  House  of  Commons,  was  a  double 
action,  which  required  each  department  of  the  bank  to  take 
measures  for  self-protection  and  made  the  bank's  action  on 
the  money  market  ' '  as  violent  on  a  drain  of  three  millions, 
as  would  have  been  required  on  the  old  system  for  one  of 
six."  The  banking  department  might  be  completely 
wrecked  by  the  exhaustion  of  its  note  reserve,  without  the 
power  it  formerly  possessed  to  draw  upon  the  whole  re- 
sources of  the  bank  for  help. 

It  was  fortunate  in  many  respects  that  the  Act  of  1844 
failed  to  operate  to  contract  the  domestic  circulation  as  was 
expected.  Such  an  event  would  only  have  added  to  the  in- 
tensity of  the  panic  and  made  the  suspension  of  the  act  and 
the  issue  of  additional  notes  more  imperative.  Such  con- 
traction and  such  absence  of  expansion  as  actually  occurred 
invited  a  run  upon  the  bank  for  gold  and  notes  which  would 
not  have  occurred  under  former  conditions.  Bank  of  Eng- 
land notes  were  a  legal  tender  except  at  the  bank  and  were 
largely  employed  in  the  reserves  of  the  country  banks.  The 
absolute  limit  on  the  supply  had  the  double  effect  of  frighten- 
ing the  public  into  withdrawing  their  deposits  from  the 
banks  for  hoarding  before  the  supply  was  exhausted  and  of 
driving  the  banks  to  withdraw  their  deposits  from  the  Bank 
of  England  for  hoarding  against  this  demand  by  the  public. 
If  they  could  not  get  notes  under  such  circumstances,  they 
would  take  gold,  and  the  reduction  of  the  note  circulation  in 
the  meantime  would  only  have  increased  the  pressure.  The 
demand  for  notes,  so  long  as  their  convertibility  was  unques- 
tioned, was,  of  course,  immensely  increased  by  the  destruc- 
tion of  credit.  Hoarding  operated  to  reduce  the  visible 
quantity  of  notes  at  the  very  moment  that  the  disappearance 
of  commercial  paper  as  a  medium  of  circulation  increased 
the  necessity  for  them.  The  terrible  pressure  thus  applied 
by  the  Act  of  1844  to  the  commercial  community  compelled 
the  sale  of  goods  and  securities  in  foreign  markets  at  any 
sacrifice  which  would  bring  the  ready  currency  withheld  by 


Political  Economy,  B.  III.,  Ch.  xxiv.,  Sec.  4. 


SECOND   CENTURY  OF  THE  BANK  OF  ENGLAND.    \2J 

the  operation  of  the  Bank  Act.  The  operation  of  the  law, 
therefore,  meant  an  absolute  loss,  not  merely  in  the  nominal 
sense  of  money  denominations,  but  in  the  real  sense  of  sur- 
rendering more  English  commodities  for  a  given  quantity 
of  foreign  commodities  than  would  otherwise  have  been 
required.  1 

The  chief  contention  which  was  left  to  the  friends  of  the 
Act  of  1844,  after  the  rude  disillusionment  of  the  panic  of 
1847,  was  that  the  act  had  maintained  beyond  doubt  "  the 
convertibility  of  the  note."  They  argued  that  under  former 
conditions  and  in  previous  panics,  the  bank  had  been  drained 
of  gold  as  well  as  of  its  banking  reserve,  the  two  not  being 
then  separated,  and  that  the  ultimate  redemption  of  the  notes 
in  gold  had  been  threatened.  From  a  practical  point  of  view, 
there  was  perhaps  some  force  in  this  claim  in  behalf  of  the 
act. a  The  claim  is  subject  to  the  two  conditions,  however, 
that  a  better  knowledge  of  the  rules  of  banking  had  come 
into  operation  since  the  earlier  panics  and  that  theoretically 
the  "  convertibility  of  the  note"  was  not  perfectly  assured. 
It  is  doubtful,  indeed,  if  convertibility  could  have  been 
maintained  if  there  had  never  been,  either  in  1847,  l857>  or 
1866,  any  suspension  of  the  Bank  Act.  Loss  of  convertibility 
would  not  have  come  primarily  from  distrust  of  the  notes  or 
of  the  credit  of  the  bank,  but  from  the  pressure  for  money 
by  depositors  upon  the  private  banks  and  joint  stock  banks 
which  kept  their  reserve  with  the  Bank  of  England.  They 
would  have  come  upon  the  bank  with  a  rush  for  the  pay- 
ment of  their  deposits  and  the  point  might  very  soon  have 
been  reached  where  the  bank  had  only  public  securities  as 


1  Gilbart,!.,  345-46. 

'2  Mr.  Mill  insists  that  the  convertibility  of  the  note  "  would  have 
continued  to  be  maintained,  at  whatever  cost,  under  the  old  system," 
and  remarks  that  the  suspension  of  the  banking  department,  "in- 
volving, as  it  would,  the  probable  stoppage  of  every  private  banking 
establishment  in  London,  and  perhaps  also  the  non-payment  of  the 
dividends  to  the  national  creditor,  would  be  a  far  greater  immediate 
calamity  than  a  brief  interruption  of  the  convertibility  of  the  note." 
—Political  Economy,  B.  III.,  Ch.  xxiv.,  Sec.  3,  note. 


128          HISTORY  OF  MODERN  BANKS   OF  ISSUE. 

the  guarantee  of  its  circulation.  The  effort,  in  other  words, 
to  keep  the  bank  standing  a  solitary  monument  of  unimpaired 
credit  when  every  other  part  of  the  credit  system  of  the 
country  had  fallen  a  mass  of  ruins  around  it  could  not 
have  succeeded.  This  was  the  logical  meaning  of  the 
propositions  of  those  who  insisted  that  the  Act  of  1844  main- 
tained "the  convertibility  of  the  note,"  so  far  as  they  had 
any  definite  meaning,  and  it  was  a  proposition  which  was 
utterly  chimerical. 

If  the  limitations  of  the  Act  of  1844  have  been  of  any  value 
to  the  English  people,  it  has  probably  been  in  driving  them 
to  the  adoption  of  substitutes  for  circulating  notes  and  to  the 
extension  of  deposit  banking.  England  was  sufficiently  far 
advanced  in  1844  in  the  use  of  instruments  of  credit  to  make 
the  restrictions  of  the  Bank  Act  of  much  less  importance  than 
such  restrictions  would  have  proved  in  a  new  and  undevel- 
oped country.  One  of  the  devices  adopted  in  London  for 
promoting  the  movement  of  capital  was  the  Cheque  Bank. 
Money  was  received  by  this  bank  on  deposit,  and  books  of 
checks  were  issued  for  even  denominations,  which  might  be 
filled  in  for  less  than  the  denomination  but  not  for  more. 
The  face  value  of  the  checks  issued  did  not  exceed  the 
depositor's  credit,  so  that  the  receiver  of  such  a  check  had 
the  assurance  of  the  bank  that  the  depositor's  account  was 
not  overdrawn.  Such  checks  were  made  payable  by  the 
Cheque  Bank  only  through  some  other  banker  and  not  at 
the  counter  of  the  bank,  thereby  escaping  the  prohibition  of 
the  law  against  promissory  notes  payable  to  bearer  on  de- 
mand. The  checks  passed  between  individuals  for  cash  and 
the  Cheque  Bank  established  relations  with  some  1500 
domestic  and  foreign  banks  which  agreed  to  receive  and 
cash  its  checks.  Several  railways  and  other  companies  re- 
ceived these  checks  as  cash  and  they  proved  convenient  for 
transmission  through  the  mails.1  The  Cheque  Bank,  there- 
fore, put  in  operation  a  sort  of  emergency  currency,  outside 
the  law,  if  not  in  violation  of  law,  which  has  been  resorted 


1  MacLeod,  Theory  and  Practice  of  Banking,  II,  374-75. 


SECOND   CENTURY  OF  THE  BANK  OF  ENGLAND.     12g 

to  in  other  countries  only  under  the  pressure  of  commercial 
distress. 1 

A  much  more  important  and  scientific  step  than  cast-iron 
rules  of  circulation  was  adopted  by  the  Bank  of  England  for 
the  protection  of  its  gold  reserve  after  the  crisis  of  1857. 
This  step  consisted  in  raising  the  rate  of  interest  rapidly  by 
degrees  of  one  per  cent,  at  a  time,  instead  of  fractions  of  one 
per  cent. ,  in  order  to  arrest  the  export  of  gold.  The  increas- 
ing ease  and  cheapness  of  communication  had  destroyed  the 
value  of  differences  of  a  fraction  of  one  per  cent.,  when  this 
fraction  was  divided  into  fractions  of  a  year,  in  attracting 
gold  from  foreign  countries  or  arresting  its  departure.  The 
theory  of  statesmen  and  students  of  political  economy  had 
generally  recognized  up  to  this  time  only  two  causes  of  the 
export  of  gold — payments  for  merchandise  and  the  pressure 
of  a  depreciated  currency.  The  bullion  brokers,  without 
spending  time  over  theories,  had  long  since  learned  by  obser- 
vation that  it  became  profitable  to  export  gold  when  interest 
rates  abroad  were  higher  than  at  home.  They  fabricated 
bills  of  exchange,  had  them  discounted  by  bankers,  took  the 
proceeds  in  gold  and  shipped  the  gold  to  the  point  where  it 
would  earn  the  highest  interest.  The  bills  fabricated  for 
this  purpose  had  the  character  of  accommodation  bills,  in 
that  they  represented  no  merchandise  transaction  and  were 
drawn  for  the  single  purpose  of  transferring  money  from  the 
place  where  it  was  cheap  to  the  place  where  it  was  dear,  in 
order  to  earn  the  higher  rate  of  interest. 

The  fact  and  possibility  of  such  shipments  of  gold  do  not 
seem  to  have  been  known,  or  at  least  fully  understood,  up 
to  this  time,  by  the  staid  old  merchants  who  formed  a  ma- 
jority of  the  board  of  directors  of  the  Bank  of  England. 
The  necessity  of  meeting  the  drain  by  rapid  advances  in  the 
rate  of  discount  was  first  set  forth  in  the  literature  of  political 
•economy  by  Prof.  H.  D.  MacLeod,2  was  quickly  adopted  as 
the  true  theory  by  Mr.  Goschen,  and  put  in  force  by  the  bank 

1  For  a  similar  device  in  Austria,  see  the  closing  portion  of  Chapter 
ix. 

2  Theory  of  Credit,  II.,  813-18. 

9 


130          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

which,  on  this  occasion,  according  to  Mr.  Bagehot,  "  and  as 
far  as  I  know,  on  this  occasion  alone,"  made  "  an  excellent 
alteration  of  their  policy  which  was  not  exacted  by  contem- 
porary opinion,  and  which  was  in  advance  of  it."  l  The 
results  were  even  more  striking  than  were  anticipated  by 
the  advocates  of  the  new  theory,  and  are  thus  summed  up 
for  the  next  few  years  by  Mr.  Bagehot : 

The  beneficial  results  of  the  improved  policy  of  the  bank  were  pal 
pable  and  speedy  :  we  were  enabled  by  it  to  sustain  the  great  drain 
of  silver  from  Burope  to  India  to  pay  for  Indian  cotton  in  the  years 
between  1862  and  1865.  In  the  autumn  of  1864  there  was  especial 
danger  ;  but  by  a  rapid  and  able  use  of  their  new  policy,  the  Bank  of 
England  maintained  an  adequate  reserve,  and  preserved  the  country 
from  calamities  which,  if  we  had  looked  only  to  precedent,  would 
have  seemed  inevitable.  All  the  causes  which  produced  the  panic  of 
1857  were  in  action  in  1864 ;  the  drain  of  silver  in  1864  and  the  preceding 
year  was  beyond  comparison  greater  than  in  1857  and  the  years  before 
it ;  and  yet  in  1864  there  was  no  panic.  The  Bank  of  England  was 
almost  immediately  rewarded  for  its  adoption  of  right  principles  by 
finding  that  those  principles,  at  a  severe  crisis,  preserved  public  credit.2 

The  great  expansion  of  English  banking  after  the  middle 
of  the  century  led  to  serious  doubts  as  to  the  capacity 
of  the  Bank  of  Bngland  to  maintain  commercial  credit  in 
every  conceivable  emergency.  Mr.  Bagehot  pointed  out  in 
his  celebrated  work,  Lombard  Street,  more  than  twenty 
years  ago,  that  the  entire  fabric  of  English  credit  rested 
upon  the  gold  reserve  of  the  Bank  of  England.  The  reserve 
had  then  increased  somewhat  above  its  level  in  earlier  times, 
but  was  still  considered  by  many  as  affording  an  insufficient 
protection  for  the  great  volume  of  the  banking  business  of 
the  country.  The  private  and  joint  stock  banks  made  no 
effort  to  maintain  a  coin  reserve  of  their  own,  for  such  a 
policy  would  have  locked  up  their  capital  and  driven  them 
to  the  wall  in  the  fierce  competition  for  fractional  profits. 
They  carried  only  such  cash  as  was  needed  from  day  to  day 
for  ordinary  transactions,  and  relied  upon  their  deposits  with 

1  Lombard  Street,  Works,  V.,  118. 

2  For  a  temporary  failure  of  the  new  rule  to  act,  and  the  reason  for  it, 
see  account  of  the  crisis  of  1866,  in  Ch.  xxi. 


SECOND   CENTURY  OF  THE  BANK  OF  ENGLAND.    131 

the  Bank  of  England  for  cash  to  meet  emergencies.  The 
system  thus  created  was  graphically  called  "the  one  reserve 
system,"  and  under  it  the  credit  of  the  entire  business  com- 
munity depends  upon  the  solvency  of  the  Bank  of  England.1 

Private  deposits  with  the  bank  were  ^9, 000,000  in  1844  ; 
they  were  ^£18, 000,000  in  1872  ;  they  were  ^50,295,171  for 
the  week  ending  October  6,  1895.  The  growth  in  the  de- 
posits of  the  joint  stock  banks  and  private  bankers  has  also 
been  rapid.  They  were  ^120,000,000  in  1872  ;  they  are 
probably  ^200, 000,000  in  1896.  These  deposits  include 
such  of  the  funds  of  the  country  banks  as  are  deposited  with 
the  private  and  joint  stock  banks,  but  they  do  not  include 
the  additional  obligations  of  the  country  banks  to  their 
depositors. 

The  experience  of  three  crises  since  the  Bank  Act  of  1844 
has  given  serious  warning  of  the  shock  which  would  come  to 
every  British  interest  if  the  Bank  of  England  should  prove 
inadequate  to  support  the  fabric  of  British  credit  and  to  sup- 
ply all  foreign  demands  for  gold.  Mr.  Bagehot  fixed  ' '  the 
apprehension  minimum,"  below  which  the  bank  reserve 
could  not  go  without  exciting  alarm,  at  £  10,000,000,  and 
he  maintained  that  measures  to  protect  the  reserve  should 
begin  to  betaken  when  it  dropped  below  ^"15,000,000.  The 
reserve  was  gradually  strengthened  by  the  accumulation  of 
gold  and  by  the  financial  blunders  of  other  countries  until  it 
stood  in  1891  at  ^22,295,403  ;  but  this  expansion  no  more 
than  kept  pace  with  the  expansion  of  credit  and  did  not 
diminish  apprehension  for  the  future.  Mr.  Goschen,  the  dis- 
tinguished financier  who  has  several  times  acted  as  Chan- 
cellor of  the  Exchequer,  proposed  a  plan  in  1891  for  issuing 
£i  notes  upon  a  reserve  consisting  of  four-fifths  gold  and  one- 
fifth  securities.  The  purpose  of  the  plan  was  to  substitute 
the  notes  for  gold  in  the  hands  of  the  public,  and  to  draw 

1  The  Irish  and  Scotch  banks  of  issue  hold  gold  funds,  which 
amounted  on  October  5,  1895,  to  ^"8,810,739,  t>ut  this  gold  is  more  or 
less  tied  up  by  the  laws  governing  their  circulation,  and  calls  are 
almost  invariably  made  for  gold  upon  the  Bank  of  England  in  times 
of  stringency. 


132          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

the  gold  into  the  bullion  reserve  of  the  bank.  Mr.  Goschen 
proposed,  if  the  bullion  in  the  bank  was  raised  by  this  means 
to  ^30,000,000,  to  "give  certain  additional  powers  of  issue  in 
times  of  emergency ,"  by  authorizing  the  bank  to  strengthen 
the  reserve  in  the  banking  department  by  the  issue  of  addi- 
tional notes  against  securities,  on  paying  to  the  government 
a  high  rate  of  interest,  to  be  fixed  by  law.1  Mr.  Goschen 's 
proposals  were  much  discussed,  but  did  not  result  in  defi- 
nite action. 

Recent  events  have  changed  the  entire  face  of  the  problem 
by  strengthening  the  reserve  beyond  all  past  precedent  and 
removing  any  fear  that  it  will  not  be  adequate  for  all  de- 
mands. The  chief  of  these  events  has  been  the  enormous 
production  of  gold  in  South  Africa,  which  has  been  flowing 
into  the  Bank  of  England  for  the  past  two  years  at  a  rate 
never  equalled  in  its  history.  The  bullion  in  the  bank  rose 
at  the  end  of  December,  1894,  to  ^32,547,000,  and  had  in- 
creased on  January  i,  1896,  to  ,£44,960,056.  The  bullion 
now  exceeds  the  note  issues  by  fifty  per  cent. ,  is  equal  to 
nearly  75  per  cent,  of  the  deposits  and  post-bills  in  the  bank- 
ing department,  and  is  equal  to  about  fifty  per  cent,  of  the 
combined  liability  for  note  issues  and  deposits.  The  influx 
of  gold  has  been  so  rapid  that  the  question  is  already  being 
discussed,  whether  the  effect  will  not  be  to  stimulate  spec- 
ulation and  to  burden  the  country  with  a  mass  of  dead 
stock  wrhich  is  not  really  needed  for  monetary  purposes.  The 
necessity  of  suspending  the  free  coinage  of  gold,  in  order  to 
limit  the  circulation,  has  already  been  suggested  by  Mr. 
W.  R.  Lawson,  who  discusses  the  effect  of  the  recent  addi- 
tions to  the  bullion  fund  in  the  following  terms  :  * 

A  forty-three  million  gold  reserve  has  become  the  dominant  factor 
in  a  financial  situation  altogether  abnormal,  the  peculiar  characteristics 
of  which  decline  to  be  judged  by  the  rules  or  traditions  of  the  past. 
Revolving  round  this  huge  gold  reserve,  and  reflecting  all  its  fluctua- 
tions, we  have  a  growing  plethora  of  loanable  capital,  unwieldy  masses 

1  Letter  to  the  governor  of  the  bank,  Dec.  3,  1891.  London  Bank- 
ers' Magazine,  LIU.,  2-3. 

8  London  Bankers'  Magazine,  October,  1895,  LX.,  492-93. 


SECOND   CENTURY  OF  THE  BANK  OF  ENGLAND.    133 


of  deposits  in  banks  and  other  financial  institutions,  where  they  have 
next  to  no  productive  value  ;  an  insatiable  demand  for  high-class 
investments,  which  has  driven  prices  up  to  a  dangerous  level ;  a  great 
wave  of  speculation  spreading  from  one  market  to  another  till  the 
entire  business  of  the  country  seems  likely  to  be  infected  soon  with 
the  morals  of  the  Kaffir  circus  ;  a  prolonged  depression  in  all  the 
legitimate  industries  of  the  country,  agricultural  and  manufacturing  ; 
our  foreign  markets  nearly  all  upset  by  currency  agitations  and 
experiments,  which  reduce  international  exchange  to  a  daily  and 
hourly  gamble  ;  our  domestic  industries  transferred  from  private 
hands  to  joint  stock  companies,  which  have  revolutionised  all  the  old 
methods  and  ideas  of  business.  Facility  of  financing  has  been  the 
principal  factor  in  these  transformations,  and  anything  which  helps  or 
encourages  facility  of  financing,  must  accelerate  the  economic  crisis 
we  are  passing  through.  Nothing  could  act  so  powerfully  in  that 
direction  as  loading  up  the  Bank  of  England  with  gold,  which  it  is 
obliged  to  turn  at  once  into  loanable  capital,  thereby  diminishing  the 
loanable  value  of  all  pre-existing  capital  of  the  same  class. 

The  measure  of  the  changes  in  the  bullion  in  the  bank  in 
recent  years,  as  well  as  the  state  of  the  other  leading  items 
of  the  bank's  accounts,  for  the  average  of  the  last  quarter  in 
each  year,  is  given  in  the  following  table : 


YEA 

NOTES  IN 
CIRCULATION. 

DEPOSITS. 

SECURITIES. 

BULLION. 

l880 

^26,829,000 

/31,  350,000 

^34,839,000 

^"26,406,000 

1881 

26,237,OOO 

28,633,000 

37,096,000 

20,876,000 

1882 

26,351,000 

27,410,000 

36,147,000 

2O,75I,OOO 

1883 

25,683,OOO 

29,205,000 

35,669,000 

22,355,000 

1884 

25,222,999 

29,346,720 

36,336,69! 

20,360,721 

1885 

24,621,423 

29,344,372 

34,643,349 

20,826,856 

1886 

24,691,913 

27,038,698 

33,895,673 

19,929,836 

1887 

24,209,867 

26,930,149 

32,508,224 

20,238,539 

1888 

24,405,030 

29,281,524 

35,977,745 

19,455,412 

1889 

24,460.836 

29,837,081 

36,301,144 

19,712,368 

1890 

24,732,153 

35,414,155 

39,168,647 

21,820,279 

1891 

25,510,059 

34,830,397 

38,607,719 

23,159,668 

1892 

26,039,500 

34,367,453 

36,809,048 

24,991,060 

1893 

25,778,436 

34,204,021 

35,543,o67 

25,865,721 

1894 

25,528,878 

41,614,576 

32,937,638 

35,262,470 

1895  l 

26,458,425 

56,526,619 

48,922,039 

44,960,056 

The  Bank  of  England  is  governed  by  a  court  of  twenty- 
four  directors,  and  a  governor  and  deputy  governor  who 
serve  for  a  term  of  one  year.  The  senior  director  who  has 

1  Average  for  week  ending  January  i,  1896. 


134         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

not  already  served  is  usually  made  governor  and  the  next  in 
seniority  deputy  governor.  A  part  of  the  directors  retire  every 
year,  but  these  are  usually  the  younger  ones,  so  that  the  older 
always  remain.  It  is  customary  to  choose  young  men  for  va- 
cancies in  the  board,  so  that  they  will  be  still  in  the  possession 
of  physical  vigor  when  their  turn  comes  to  be  governor.1 
Bankers  in  the  strictly  English  sense,  lenders  of  money  for 
short  terms  on  commercial  paper,  are  not  allowed  to  serve  on 
the  board  of  directors,  but  this  rule  does  not  exclude  the  leaders 
of  finance  who  are  engaged  in  other  branches  of  the  banking 
business.  It  is  usually  about  twenty  years  from  the  time  of 
a  man's  entry  upon  the  board  of  directors  until  he  is  reached 
in  his  turn  as  governor,  and  it  is  rarely  that  a  director  is 
made  governor  out  of  his  turn  or  serves  more  than  one  year. 
The  board  meets  with  the  governor  and  deputy  every  Thurs- 
day in  what  has  become  historic  as  "  the  bank  parlor,"  to 
pass  upon  the  report  for  the  week.  The  branches  of  the 
bank  are  limited  to  a  few  leading  cities,  and  a  large  share  of 
the  business  of  the  bank  is  derived  from  the  deposits  of  the 
private  banks  and  joint  stock  banks. 

The  Bank  of  England  has  been  comparatively  free  from 
government  interference  since  the  time  of  Pitt.  It  receives 
the  public  deposits  and  performs  many  financial  operations 
for  the  government,  but  it  differs  from  many  Continental 
banks  in  the  sense  that  "it  is  purely  the  banker  of  the 
state,  and  not  its  cashier,  and  as  such  maintains  with  it 
the  same  relations  as  with  the  individuals  and  companies 
which  constitute  its  clientage."2  There  is  no  division  of 
profits  with  the  state  and  only  moderate  taxes  are  paid. 
The  private  and  joint  stock  banks  which  issue  notes  are  so 
similar  in  character  to  those  without  circulation  that  the 
statistics  are  rarely  separated.  The  number  of  banking 
offices  open  in  Great  Britain  at  the  close  of  1894  was  5612, 
of  which  477  were  in  London  and  the  suburbs,  3538  in  other 
parts  of  England  and  Wales,  15  in  the  Isle  of  Man,  ion  in 
Scotland,  and  571  in  Ireland. 

1  Bagehot,  Works,  V.,  136. 

2  Noel,  I.,  232. 


SECOND   CENTURY  OF  THE  BANK  OF  ENGLAND.    135 


The  total  resources  of  all  the  banks  of  the  United  King- 
dom of  Great  Britain  and  Ireland,  including  banks  of  de- 
posit merely  as  well  as  banks  of  issue,  are  over  £i  ,000,000,000. 
The  banks  of  deposit  have  of  late  years  become  more  and 
more  in  the  habit  of  making  public  their  accounts,  until  all 
but  an  insignificant  proportion  now  do  so.  These  returns 
have  been  compiled  for  the  close  of  1894  and  earl)r  part  of 
1895  by  Mr.  R.  H.  Inglis  Palgrave,1  and  show  an  aggregate 
capital  of  ^85, 629,366  ;  reserve  fund,  ,£37,896,899;  deposit 
and  note  liability,  £721,371,206  ;  cash  in  hand  and  on  short 
notice,  £185,146,719;  and  discounts  and  advances,  ,£446,- 
269,821.  The  aggregates  include  the  Isle  of  Man,  with 
banking  resources  of  £1,992,856.  The  figures  for  the  greater 
divisions  of  the  United  Kingdom  are  given  below,  those  for 
Scotland  representing  entirely  banks  of  issue  : 


LIABILITIES. 


ENGLAND   AND 
WALES. 

SCOTLAND. 

IRELAND. 

Capital  paid   

/"6o  121  115 

/"o,  302,000 

f-i  ioi  251 

Reserve  fund    

2Q.O37,  525 

5,694,879 

3,064  605 

Acceptances,   endorsements  . 
etc. 

16  QIQ  018 

•7  105  4.77 

166  492 

Deposits,  current  accounts.  . 
and  note  circulation  

570,138,250 

100  538  870 

48  921  672 

Miscellaneous  

3,961,744 

057,880 

471,508 

Total 

689,177,661 

119,599,111 

59,728,708 

ASSETS. 


Cash  in  hand  and  on  short  .  . 
notice,  

,£158,833,302 

£17,343,954 

,£8,756,180 

Brit.  Gov.  investments  
Other  investments 

83,497,584 
66  787  ^4.0 

14,281,452 
2O  68^  7Q5 

6,899,170 
97IO  780 

Discounts  and  advances 

oe  I  Q44  O75 

60  826  034 

q-j  -126  566 

Acceptances,  etc  

16  919  018 

3  IO5  473 

1  66  492 

Buildings   etc  

12  096  342 

3058  401 

869  520 

Total 

689,177,661 

119,599,111 

59,728,708 

1  L/ondon  Bankers'  Magazine,  April,  1895,  LJX.,  529. 


I36         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

One  of  the  criticisms  which  has  been  made  upon  the  opera- 
tion of  the  Act  of  1844  is  the  great  number  of  changes  in 
the  discount  rate  which  have  taken  place  at  the  Bank  of 
England  since  that  time.  The  criticism  is  not  directed 
against  the  propriety  of  the  changes  when  they  have  been 
made,  but  against  the  underlying  causes  which  have  made 
them  necessary.  The  fact  that  England  is  the  centre  of  the 
exchanges  of  the  world  and  feels  the  pressure  of  the  demand 
for  gold  and  silver  from  every  quarter  has  undoubtedly  had 
much  to  do  with  these  changes,  but  it  has  been  pointed  out 
that  they  have  not  diminished  in  frequency  since  Paris  has 
regained  some  of  the  exchange  business  she  lost  during 
specie  suspension  and  Berlin  has  become  an  important  money 
market.1  Changes  in  the  rate  of  discount  are  preferable  to 
a  dangerous  reduction  of  coin  reserves  and  are  the  modern 
method  of  checking  such  reductions,  but  a  uniform  rate  has 
the  advantage  of  offering  steady  conditions  to  legitimate  in- 
dustry. The  "  one  reserve  system,"  as  well  as  the  peculiar 
pressure  put  upon  the  Bank  of  England  by  the  Act  of  1844, 
have  been  charged  with  a  part  of  the  responsibility  for  the 
frequent  changes  in  the  discount  rate,  and  this  view  is  sup- 
ported by  the  few  changes  since  the  increase  of  the  bullion 
in  the  bank.  The  present  official  rate  is  two  per  cent,  and 
loans  are  made  below  the  official  rate  to  customers  of  the 
bank,  according  to  long  established  practice.  This  rate  was 
adopted  on  February  22,  1894,  anc^  f°r  niore  than  two  years 
remained  unchanged, — an  interval  without  precedent  in  the 
history  of  the  bank  since  the  effect  of  changes  in  the  rate 
came  to  be  fully  understood.2  The  great  number  of  changes 
between  1845,  after  the  Bank  Act  took  effect,  and  the  close 
of  1891,  in  comparison  with  those  in  other  countries,  is 
shown  in  the  following  table 3 : 

1  R.  H.  Inglis  Palgrave,  before  Institute  of  Bankers,  March  2,  1892. 
London  Bankers'  Magazine,  April,  1892,  LIU.,  551. 

2  The  rate  was  advanced  on  September  10,  1896,  to  two  and  a  half 
per  cent ;  on  September  24th  to  three  per  cent ;  and  on  October  22d 
to  four  per  cent,  on  account  of  the  large  withdrawals  of  gold  for  the 
United  States. 

3  London  Bankers'  Magazine,  May,  1892,  LI II.,  723. 


SECOND   CENTURY  OF  THE  BANK   OF  ENGLAND.    137 


TOTAL 

NUMBER     OF 

RISES. 

PER  CENT. 

FALLS. 

PER  CENT. 

CHANGES. 

OF   TOTAL. 

OF  TOTAL. 

Bank  of  England 

354 

166 

47 

188 

53 

Bank  of  France 

IOI 

43 

43 

58 

57 

Bank  of  Germany 
Bank  of  Holland 

130 
153 

62 
76 

48 
50 

68 
77 

52 
50 

Bank  of  Belgium 

161 

71 

44 

90 

56 

CHAPTER  VI. 

THE   SCOTCH    BANKING  SYSTEM. 

Its  General  Scope  and  Results— The  Bank  of  Scotland  and  the  Royal 
Bank — The  Failures  of  the  Ayr  Bank,  the  Western  Bank  and  the 
City  of  Glasgow  Bank — Advantages  of  Scotch  Banking  and  its 
Effect  upon  the  Habits  of  the  People  and  the  Prosperity  of  the 
Country — Branch  Banks  in  London  and  Limited  Liability. 

THE  Scotch  system  of  banks  of  issue  comes  nearer  to 
the  ideal  of  successful  free  banking  than  that  of  any 
other  country.  Absolute  freedom  in  note  issues 
reigned  for  over  one  hundred  years  in  Scotland,  and  during 
eighty  years  of  that  period  general  distrust  of  the  banking 
system  never  occurred,  small  notes  became  the  favorite 
medium  of  exchange  among  the  people,  and  the  deposits  in 
the  banks  absorbed  almost  the  entire  savings  of  rich  and 
poor  and  brought  within  the  circle  of  active  producing 
capital  the  entire  accumulations  of  the  country.  Such  de- 
fects as  were  disclosed  in  the  early  years  of  Scotch  banking 
were  corrected  with  experience,  and  the  few  departures 
which  have  taken  place  from  sound  principles  have  been 
such  as  to  suggest  no  change  in  the  established  practice  of 
the  majority  of  Scotch  banks,  but,  at  the  most,  some  official 
regulation  which  should  hold  all  to  the  rules  voluntarily 
adopted  by  the  oldest  banks  and  the  soundest  bankers.  The 
mania  for  restricting  note  issues  which  swept  over  the 
British  Parliament  in  1844  shut  the  circulation  of  the  Scotch 
banks  within  fixed  legal  limits,  and  limited  the  banks  of 
issue  to  those  already  in  existence,  but  left  untouched  their 
power  to  issue  small  notes  and  their  means  of  accommodat- 
ing the  people  of  Scotland  by  receiving  deposits. 

138 


THE   SCOTCH  BANKING   SYSTEM.  139 

Banking  in  Scotland  was  inaugurated  by  the  system  of 
monopoly,  but  differed  from  all  earlier  banking  systems  en- 
joying monopoly  of  note  issues  in  the  fact  that  the  first 
joint  stock  bank  was  formed  by  private  persons  for  the  ex- 
press purpose  of  promoting  trade  and  not  for  supporting  the 
credit  of  the  government.  The  charter  of  the  Bank  of  Scot- 
land, which  was  organized  under  authority  of  an  act  of  the 
Scotch  Parliament  of  July  17,  1695,  was  framed  to  some  ex- 
tent on  the  model  of  the  charter  of  the  Bank  of  England  and 
made  it  illegal  for  any  other  company  to  set  up  the  business 
of  banking  for  twenty-one  years.  The  joint  stock  was  to  be 
1,200,000  Scotch  pounds,  the  equivalent  of  100,000  English 
pounds  sterling,  and  was  to  be  subscribed  in  amounts  of  not 
less  than  ^1000  Scotch  nor  more  than  ,£20,000  Scotch 
(equivalent  to  ^83  6s.  Sd.  and  ^1666  135.  4^.  English).1  The 
bank  was  allowed  to  lend  on  real  or  personal  security  at  not 
more  than  six  per  cent.,  but  was  prohibited  from  employing 
its  stock  or  profits  in  any  other  trade  or  commerce,  except 
that  of  lending  and  borrowing  money  upon  interest  and  the 
negotiation  of  bills  of  exchange.  The  company  was  pro- 
hibited from  purchasing  land  or  from  advancing  money  to 
the  government,  upon  the  anticipation  of  any  sums  to  be 
granted  by  Parliament,  except  those  upon  which  a  loan 
should  be  authorized  by  a  specific  act. 

The  Bank  of  Scotland  soon  encountered  the  opposition  of 
the  African  Company,  otherwise  known  as  the  Darien  Com- 
pany, which  was  organized  by  William  Paterson,  the  founder 
of  the  Bank  of  England.  The  Bank  of  Scotland  had  so 
little  confidence  in  its  ability  to  protect  its  monopoly,  that  it 
made  no  serious  effort  to  contest  the  legal  rights  of  its  rival, 
but  endeavored  to  strengthen  its  position  by  calling  in  two- 
tenths  of  its  capital,  of  which  one-tenth  had  been  originally 
paid  in.  The  African  company  issued  notes  with  great  im- 
prudence, lent  to  its  own  shareholders,  and  was  obliged  to 

1  The  coinage  of  Scotland  was  assimilated  with  that  of  England  by 
the  act  of  Union  in  1707,  and  the  Bank  of  Scotland  assisted  in  the 
operation  by  receiving  the  old  money  and  giving  new  money  or  their 
own  notes  in  return. 


140          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

abandon  the  field  in  May,  1698.  The  Bank  of  Scotland 
repaid  to  their  shareholders  the  two-tenths  of  the  capital 
called  in  and  continued  for  several  years  without  a  rival.  No 
deposits  were  received  at  first  from  the  public,  but  notes  were 
issued  against  the  capital  of  the  denominations  of  ^5,  ^10, 
^20,  ^50,  and  ;£ioo.  Notes  for^i  were  first  issued  between 
1699  and  1704.  A  run  was  begun  in  December  of  the  latter 
year,  which  compelled  the  bank  to  suspend  specie  payments. 
A  meeting  of  the  proprietors  was  held  and  a  device  adopted 
which  is  still  of  interest  because  it  is  similar  to  the  existing 
laws  of  Canada  and  Germany  in  the  case  of  failed  banks. 
This  device  consisted  in  making  the  notes  bear  interest  until 
they  were  paid  and  resulted  in  keeping  the  notes  at  par. 
Payment  was  made  with  interest  in  less  than  five  months, 
by  means  of  a  new  call  upon  the  proprietors  for  one-tenth 
of  the  nominal  capital.  Another  run  upon  the  bank  was 
made  in  September,  1715,  when  the  rebellion  on  behalf  of 
the  Stuarts  broke  out,  and  the  withdrawal  of  coin  by  the 
presentation  of  the  notes  was  encouraged  by  the  bank  direc- 
tors in  order  to  prevent  the  seizure  of  the  coin  reserve  by  the 
insurgents.  The  bank  suspended  payment  after  most  of  the 
cash  had  been  withdrawn  and  gave  notice  again  that  the 
notes  would  bear  interest  until  paid.  The  monopoly  of 
banking  for  twenty-one  years  expired  in  1716  and  no  steps 
were  taken  to  renew  it. 

The  second  successful  bank  in  Scotland  was  formed,  as  in 
the  case  of  the  Bank  of  Venice  and  Bank  of  England,  by 
the  proprietors  of  the  public  debt,  which  they  assumed  011 
the  union  with  England.  An  act  which  was  passed  in  1719 
empowered  the  King  to  incorporate  the  proprietors  of  the 
debt  into  a  body  corporate,  which  was  organized  in  1724. 
The  new  corporation  endeavored  to  secure  admission  to  the 
Bank  of  Scotland,  upon  the  terms  of  increasing  the  capital 
of  the  united  bank  by  the  sum  of  ^"250,000, — the  principal 
of  the  debt, — and  the  division  of  the  annual  interest  of  ^10,- 
ooo  in  the  proportion  of  two-sevenths  to  the  shareholders  of 
the  bank  and  five-sevenths  to  the  holders  of  the  debt.  The 
bank  was  making  dividends  which  were  declared  b}'  rivals  to 


THE   SCOTCH  BANKING  SYSTEM.  141 

run  as  high  as  fifty  per  cent.,  and  they  replied  that  they  had 
no  legal  authority  to  increase  their  capital,  that  their  stock 
was  large  enough  for  the  banking  business  of  the  country, 
and  that  they  would  not  in  any  case  unite  with  the  holders 
of  the  debt  at  par  while  their  stock  was  worth  at  least  ten 
per  cent,  and  the  debt  only  paid  four  per  cent.  The  holders 
of  the  debt,  or  the  Equivalent  Fund,  as  it  was  called,  then 
petitioned  the  King  for  banking  powers,  which  were  granted 
on  May  31,  1727.  These  powers  were  not  granted  without 
powerful  opposition  from  the  old  bank,  whose  defenders 
declared  that  their  capital,  which  they  had  called  in  to  the 
amount  of  three-tenths,  making  an  aggregate  of  ,£30,000, 
was  sufficient  to  circulate  all  the  credit  that  could  be  re- 
quired in  Scotland.  The  last  call  made  for  the  payment  of 
capital  was  partly  paid  in  the  notes  of  the  bank.  This  raised 
a  great  outcry  from  unthinking  persons,  who  maintained 
that  the  payments  should  be  made  in  specie,  but  they  were 
answered  by  the  scientific  statement  that  ' '  bank-notes  are 
j  ustly  reckoned  the  same  as  specie  when  paid  in  on  a  call  of 
stock,  because,  when  paid  in,  it  lessens  the  demand  on  the 
bank."  ' 

The  new  bank  was  known  as  the  Royal  Bank  of  Scotland 
and  began  business  on  December  8,  1727,  with  a  capital 
stock  of  ^151,000.  They  received  support  from  the  govern- 
ment by  the  deposit  of  ,£20,000  of  public  monies  and  their 
business  rapidly  extended.  The  Royal  Bank  is  entitled  to 
the  credit  of  the  invention  of  cash  credits,  the  unique  feature 
of  Scotch  banking  which  has  done  so  much  to  promote  the 
prosperity  of  Scotland  and  to  place  business  success  and 
wealth  within  the  reach  of  the  humblest  of  her  people. 
There  was  a  deal  of  friction  between  the  two  banks  during 
these  early  years  and  the  Bank  of  Scotland  introduced  a 
clause  into  their  notes  making  them  payable  at  the  discre- 
tion of  the  directors  at  the  end  of  six  months,  with  the 
interest  from  the  time  of  presentation  until  the  time  of  pay- 
ment, instead  of  payable  in  coin  on  demand.  This  practical 
suspension  of  redemption  on  demand  resulted  in  excessive 

1  MacLeod,  Theory  and  Practice  of  Banking \  II.,  203. 


142          HISTORY  OF  MODERN  BANKS   OF  ISSUE. 

issues  of  notes,  not  only  by  the  two  leading  banks,  but  by 
private  banking  and  manufacturing  companies,  and  the  fall 
of  the  notes  below  par.  The  attempt  to  maintain  coin  re- 
demption was  carried  out  by  a  process,  which  is  described  in 
detail  by  Adam  Smith,1  of  collecting  coin  through  London 
agents  and  sending  it  down  in  wagons  to  Scotland.  Bills 
of  exchange  were  constantly  drawn  upon  London  to  cover 
coin  obligations  and  their  payment  was  often  provided  for 
only  by  drawing  fresh  bills.  The  fact  that  the  bank  paper 
was  below  par  led  to  the  constant  presentation  of  notes  for 
redemption  and  justified  Smith's  declaration  that  "  bringing 
gold  into  the  country  was  like  pouring  water  into  a  sieve,  or 
like  the  toil  of  Danaides."  The  two  principal  banks  soon 
saw  the  folly  of  this  method  of  doing  business  and  agreed  to 
combine  their  influence  to  obtain  an  act  of  Parliament,  which 
was  passed  in  1765,  prohibiting  the  issue  of  notes  with  the 
optional  clause,  making  all  such  notes  payable  to  bearer  on 
demand,  and  prohibiting  notes  under  twenty  shillings  ($5). 

The  Bank  of  Scotland  and  the  Royal  Bank  were  the  only 
chartered  banks  until  the  incorporation  of  the  British  Linen 
Company  at  Edinburgh  in  1746.  This  company  was  organ- 
ized for  the  purpose  of  promoting  the  linen  industry  by 
lending  money  to  the  manufacturers  and  as  the  Company 
was  thus  led  into  the  banking  business  it  soon  found  it  ex- 
pedient to  continue  as  a  banking  company  only,  under  the 
original  name.3  The  next  important  institution  founded  was 
the  Ayr  Bank,  which  distinguished  itself  by  a  radical  depart- 
ure from  the  methods  of  the  older  Scotch  banks.  The 
wonderful  expansion  of  Scotch  agriculture  and  industry 
after  the  failure  of  the  Jacobite  rebellion,  under  the  stimulus 
of  conservative  free  banking  and  the  system  of  cash  credits, 
was  not  rapid  enough  for  certain  restless  spirits  who  wished 
to  borrow  far  beyond  their  capital  or  credit.  The  Ayr  Bank 
was  formed  with  the  avowed  purpose  of  adopting  a  more 
liberal  policy,  and  the  course  of  the  older  banks  in  gradually 


1  Wealth  of  Nations,  Book  II.,  Ch.  ii.,  i,  302. 

2  Cunningham,  II.,  350. 


THE   SCOTCH  BANKING  SYSTEM.  143 

curtailing  the  discounts  of  a  group  of  speculators  who  were 
dealing  in  accommodation  paper  drove  all  this  class  of  busi- 
ness to  the  new  bank.  The  result  was  the  over-issue  of 
notes,  which  came  back  so  rapidly  upon  the  bank  for  re- 
demption in  coin  that  it  was  necessary  to  draw  constantly 
upon  London  and  to  incur  heavy  expenses  for  commissions 
and  interest.  As  Adam  Smith  describes  the  operations  of 
the  bank  : 

When  it  was  obliged  to  stop,  it  had  in  the  circulation  about  ^200,000 
in  bank-notes.  In  order  to  support  the  circulation  of  those  notes, 
which  were  continually  returning  upon  it  as  fast  as  they  were  issued 
it  had  been  constantly  in  the  practice  of  drawing  bills  of  exchange 
upon  London,  of  which  the  number  and  value  were  continually  in- 
creasing, and,  when  it  stopped,  amounted  to  upwards  of  ^600,000. 
This  bank,  therefore,  had  in  little  more  than  the  course  of  two  years 
advanced  to  different  people  upwards  of  ^800,000  at  five  per  cent. 
Upon  the  ,£200,000,  which  it  circulated  in  bank-notes,  this  five  per 
cent,  might  perhaps  be  considered  as  clear  gain,  without  any  other 
deduction  besides  the  expense  of  management.  But  upon  upwards 
of  ^600,000  for  which  it  was  continually  drawing  bills  of  exchange 
upon  London,  it  was  paying,  in  the  way  of  interest  and  commission, 
upwards  of  eight  per  cent.,  and  was,  consequently,  losing  more  than 
three  per  cent,  upon  more  than  three-fourths  of  all  its  dealings. 

The  Ayr  Bank  was  founded  by  a  company  which  com- 
prised the  Duke  of  Hamilton  and  many  other  wealthy  landed 
proprietors  and  it  was  supposed  that  their  estates,  which 
were  pledged  by  the  unlimited  liability  of  the  stockholders, 
would  suffice  to  maintain  the  notes  of  the  bank  at  par  and 
supply  it  with  coin.  The  failure  of  the  experiment  proved 
two  of  the  essential  principles  of  a  banking  currency — that 
no  greater  volume  of  notes  can  be  maintained  in  circulation 
than  the  convenience  of  business  requires,  and  that  landed 
security  is  not  the  equivalent  of  coin  in  maintaining  the  re- 
demption of  notes  on  demand  or  the  credit  of  a  bank.  The 
period  of  the  operation  of  the  Ayr  Bank  was  one  of  exten- 
sive speculation  and  large  Scotch  exports,  but  the  apparent 
prosperity  was  brought  to  a  sudden  halt  by  the  crisis  of  1772, 
which  began  in  London  on  June  loth,  and  caused  a  run  upon 


144          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

the  Edinburgh  branch  of  the  Ayr  Bank  just  one  week  later. 
The  bank  continued  its  payments  until  June  25th,  when  it 
was  compelled  to  suspend  and  its  great  mass  of  obligations 
was  discredited. 

The  Bank  of  Scotland  was  authorized  in  1774  to  double 
its  capital  stock,  and  began  in  this  year  the  policy  of  estab- 
lising  branches  which  has  become  so  striking  a  feature  of 
Scotch  banking.  Efforts  had  been  made  in  1696  and  again 
in  1731  to  establish  branches  in  Glasgow,  Aberdeen,  Dundee, 
and  one  or  two  other  places,  but  in  both  instances  proved 
unprofitable  and  were  abandoned  after  a  year  or  two.  The 
capital  of  the  Bank  of  Scotland  was  increased  in  1784  to 
,£300,000,  in  1792  to  ,£600,000,  in  1794  to  ,£1,000,000,  and 
in  1804  to  ,£1,500,000,  of  which  ;£  1,000,000,  was  paid  in. 
The  present  paid  up  capital  is  ,£1,250,000  and  the  nominal 
capital  ;£i,875,ooo.  The  capital  of  the  Royal  Bank  has  been 
raised  to  ,£2,000,000,  all  of  which  has  been  paid  in.  The 
capital  of  the  British  Linen  Company  is  ,£1,000,000,  all  paid 
in.  The  Commercial  Bank  was  founded  in  1810  as  the  bank- 
ing institution  of  the  Liberal  party,  with  a  paid-up  capital 
of  ,£  i,  ooo,  ooo,  which  was  strengthened  later  by  a  reserve 
fund  of  ^"400,000.  The  nominal  capital  is  now  .£5,  ooo,  ooo. 
These  four  banks — the  Bank  of  Scotland,  the  Royal  Bank, 
the  British  Linen  Company,  and  the  Commercial  Bank — 
are  the  oldest  institutions  now  in  existence.  The  other 
banks  of  issue  which  wrere  in  operation  when  the  Act  of 
1845  forbade  the  extension  of  the  system  were  for  the  most 
part  founded  as  late  as  1825,  the  date  of  the  foundation  of 
the  existing  National  Bank  of  Scotland  and  the  Abderdeen 
Town  and  County  Bank.  There  were  a  few  older  institu- 
tions wThich  have  since  ceased  to  exist,  among  them  being 
the  Perth  Banking  Company,  founded  in  1766  and  united 
with  the  Union  Bank  in  1857,  and  the  Dundee  Banking 
Company,  founded  in  1763  and  united  with  the  Royal  Bank 
of  Scotland  in  1864. 

The  strength  of  the  Scotch  banking  system  was  illustrated 
by  the  events  which  followed  the  suspension  of  specie  pay- 
ments in  England.  The  news  reached  Edinburgh  on  March 


THE   SCOTCH  BANKING   SYSTEM.  145 

i,  1797,  and  a  meeting  of  the  bank  officers  decided  that  it 
would  be  necessary  for  the  Scotch  banks  to  follow  the  example 
of  the  Bank  of  England.  There  were  symptoms  of  a  run 
for  a  few  days,  and  the  disappearance  of  specie  led  to  the  cut- 
ting of  £i  notes  into  quarters  to  afford  a  currency  for  small 
transactions.1  The  Lord  Provost  called  a  meeting  of  the 
principal  inhabitants,  who  resolved  to  support  the  credit  of 
the  banks  and  to  receive  their  notes  as  specie.  Banks  which 
had  been  in  the  habit  of  issuing  notes  were  allowed  to  issue 
notes  for  five  shillings  for  a  limited  period  and  confidence 
quickly  returned.  No  action  was  ever  brought  against  the 
banks  for  their  failure  to  pay  specie,  the  notes  were  received 
as  confidently  as  ever,  and  in  a  short  time  business  activity 
was  resumed  and  continued  throughout  the  long  Napoleonic 
wars.  The  banks,  in  the  language  of  the  report  to  the 
Lords  in  1826,  "supported  themselves  from  1797  to  1812 
without  any  protection  from  the  restriction  by  which  the 
Bank  of  Kngland,  and  that  of  Ireland,  were  relieved  from 
cash  payments. ' ' 

The  policy  of  the  English  Bank  Act  of  1844,  to  suppress 
the  evils  of  speculation  by  restricting  bank-note  circulation, 
was  extended  to  Scotland  in  1845,"  but  several  of  the  provi- 
sions regarding  the  Scotch  banks  differ  from  those  affecting 
the  English  banks.  The  banks  of  issue  existing  in  Scot- 
land at  the  time  of  the  passing  of  the  act  were  allowed  to 
retain  an  authorized  circulation  equal  to  the  average  during 
the  year  ending  on  the  ist  of  May,  1845.  They  were  also 
authorized  to  issue  additional  notes  when  fully  covered  by 
deposits  of  coin  at  the  head  office  or  principal  place  of  issue. 
Not  more  than  one -fifth  of  this  coin  deposit  was  to  be  in 
silver.  The  Scotch  banks,  therefore,  stood  upon  an  equality 
in  issuing  notes  upon  deposits  of  coin  beyond  the  authorized 
limit,  while  the  English  banks  except  the  Bank  of  England 
were  absolutely  limited.  No  new  bank  of  issue  could  be 
founded,  however,  in  Scotland.  The  authorized  circulation 
of  the  Scotch  banks,  as  ascertained  under  the  new  law, 

1  MacLeod,  Theory  of  Credit,  II.,  601. 

2  8  and  9  Victoria,  c.  38. 


146 


HISTORY  OF  MODERN  BANKS   OF  ISSUE. 


was  ,£3,087,209.  The  limit  of  authorized  circulation  was 
reduced  by  the  suspension  of  the  Western  Bank  in  1857, 
which  had  an  authorized  limit  of  .£337,938,  and  the  similar 
suspension  of  the  City  of  Glasgow  Bank  in  1878,  which  had 
an  authorized  limit  of  .£72,921.  These  reductions  fixed  the 
authorized  circulation  at  ,£2,676,350,  where  it  now  stands. 
The  union  of  two  Scotch  banks  is  permitted  by  the  Act  of 
1845,  and  the  retention  of  the  aggregate  circulation  of  both. 
Several  unions  of  this  kind  have  taken  place  without  chan- 
ging the  limit  of  the  authorized  circulation  for  the  Kingdom. 
The  average  circulation  of  the  Scotch  banks  for  the  four 
weeks  ending  November  30,  1895,  including  that  covered 
by  coin,  is  shown  in  the  following  table  : 


BANK. 

AUTHORIZED 
CIRCULATION. 

AVERAGE  CIR- 
CULATION   FOR 
FOUR  WEEKS. 

AVERAGE  GOLD 
AND  SILVER 
HELD  FOR  FOUR 
WEEKS. 

Bank  of  Scotland 

•flAI  Al8 

Royal  Bank  of  Scotland..  .    . 

216,451 

Xj1,1^/,  J°9 
1,000,968 

950,441 

British  Linen  Company.  .  .    . 

438,024 

922,221 

630,989 

Com'l  Bank  of  Scotland.  ..    . 

374,880 

998,986 

768,312 

Nat.  Bank  of  Scotland  

297,024 

899,120 

756,8/1 

Union  Bank  of  Scotland.  .    . 

454,346 

1,039,304 

777,853 

Aberdeen  Town  and  Co.  Bk. 

70,133 

336,625 

307,902 

N.  of  Scotland  Banking  Co  . 

154,319 

484,739 

3/2,944 

Clydesdale  Banking  Co.  .  .    . 

274,321 

783,969 

625,474 

Caledonian  Banking  Co.  .  .    . 

53,434 

141,260 

99,806 

Total 

2  676  35O 

The  average  circulation  shown  consisted  of  ,£5, 170, 831  in 
notes  of  denominations  under  ,£5  and  ,£2,593,730  in  notes 
for  ;£5  and  more. 

The  history  of  Scotch  banking  was  comparatively  unevent- 
ful after  the  restrictive  legislation  of  1845,  except  for  the  two 
great  failures  of  the  Western  Bank  in  1857  and  tne  City  of 
Glasgow  Bank  in  1878.  As  these  failures  have  sometimes 
been  treated  by  the  opponents  of  Scotch  banking  as  an 
impeachment  of  its  safety  and  success,  they  are  worthy  of 
some  attention  in  detail.  Both  occurred  in  years  when 


THE   SCOTCH  BANKING  SYSTEM.  147 

other  banking  institutions  and  business  houses  in  England 
and  other  parts  of  the  world  were  collapsing,  but  both  were 
the  result  of  methods  of  banking  so  reckless  and  unsound 
that  they  had  repeatedly  received,  before  the  failures,  the 
condemnation  of  other  Scotch  bankers.  The  Western  Bank 
was  founded  in  1832  and  in  the  twenty-four  years  of  its 
operation  lost  its  entire  capital  of  ;£i, 500,000,  and  nearly 
as  much  more  from  its  other  assets.  The  Western  Bank 
from  the  outset  kept  in  I^ondon  a  reserve  which  was  much 
inferior  to  that  of  other  Scotch  banks  and  was  so  small  that 
its  drafts  were  dishonored  in  1834  by  its  L,ondon  agents. 
The  other  Scotch  banks  thereupon  refused  its  notes  and 
remonstrated  with  it  for  its  mismanagement.  The  directors 
notified  the  other  banks  on  October  30,  1834,  that  they  had 
resolved  to  invest  in  marketable  securities  a  sum  sufficient 
to  secure  themselves  in  the  future,  to  lessen  their  discounts, 
and  to  keep  sufficient  funds  to  meet  their  obligations.  The 
chartered  banks,  upon  this  pledge,  advanced  ,£100,000  to  the 
Western  Bank  to  enable  them  to  purchase  the  proposed 
securities.  But  the  management  of  the  Western  Bank  soon 
forgot  their  promises  and  returned  to  their  former  method 
of  business.  These  methods  were  so  objectionable  that 
when  they  applied  to  the  Board  of  Trade  in  1838  for  a  grant 
of  letters  patent,  the  other  banks  presented  a  joint  memorial 
against  the  grant.  This  memorial  declared  that  Scotland, 
during  the  periodical  convulsions  among  the  banks  of  Eng- 
land, which  had  led  to  the  failure  of  several  hundreds,  had 
for  the  most  part  maintained  a  state  of  general  tranquillity. 
The  memorial  continued  : 

The  cause  of  this  is  notoriously  owing,  first,  to  the  large  capital 
employed  in  the  Scotch  banks,  and,  second,  to  the  system  of  admin- 
istration adopted.  Capital  alone,  as  has  been  recently  experienced 
in  England,  by  extending  the  scale  of  operations,  may  only  increase 
the  mischief.  In  the  like  manner  a  numerous  proprietary,  consti- 
tuting a  protection  to  the  public  against  eventual  loss,  may,  by  adding 
to  the  credit,  add  to  the  power  of  such  an  institution  for  evil.  The 
safeguard  of  the  Scotch  system  has  been  the  uniform  practice  adopted 
of  retaining  a  large  portion  of  the  capital  and  deposits  invested  in 
government  securities,  capable  cf  being  converted  into  money,  at  all 


148          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

times  and  uuder  all  circumstances.  This  requires  a  sacrifice,  because 
the  rate  of  interest  is  small,  and,  in  times  of  difficulty,  the  sale  in- 
volves a  loss,  but  it  has  given  the  Scotch  banks  absolute  security,  and 
enabled  them  to  pass  unhurt  through  periods  of  great  discredit.  .  .  . 

The  Western  Bank  was  established  in  the  year  1832,  and  the  prin- 
ciple on  which  it  has  avowedly  acted  has  been  to  employ  as  much  as 
possible  of  its  capital  and  assets  in  discounts  and  loans,  retaining 
only  the  cash  necessary  to  meet  its  current  engagements.  .  .  . 

It  will  be  quite  apparent  that  a  bank  that  can  employ  its  whole 
funds  in  this  manner  is  enabled  either  to  divide  a  larger  share  of 
profits  than  its  competitors,  or  to  do  business  on  more  favorable  terms  ; 
and  we  repeat,  that  if  the  only  consequence  of  this  was  to  increase  or 
dimmish  the  dividends  of  the  rival  establishments,  it  would  be  of 
comparatively  small  importance,  but  in  its  results  it  endangers  the 
existence  of  every  bank  in  the  country  and  the  fortunes  of  a  large 
portion  of  the  community.  We  feel  that,  if  letters  patent  shall  be 
granted  to  this  bank,  after  what  has  passed,  it  will  be  a  public  sanc- 
tion and  countenance  of  a  new  and  mischievous  principle,  opposed 
to  the  banking  system  of  Scotland. 

The  charter  was  not  granted  and  as  the  result  of  keeping 
such  small  reserves  in  L,ondon  the  Western  Bank  was  again 
in  trouble  in  1847.  The  bank  was  then  compelled  to  bor- 
row  .£300,000  of  the  Bank  of  England  in  November  and 
December,  which  it  repaid  in  March,  1848.  A  somewhat 
more  cautious  policy  was  pursued  until  1852,  when  the  dis- 
counts of  the  bank  were  .£13,525,332  and  the  re-discounts 
were  ,£407, 143.  The  bank  even  at  this  time  had  ,£356,000 
in  overdue  bills  and  held  a  number  of  life  insurance  policies 
as  security  for  dead  loans,  on  which  it  was  paying  the 
premiums.  A  reckless  policy  of  re-discounting  was  begun 
in  1852  which  expanded  the  re-discounts  in  1856  to  .£5,407,- 
363  with  ordinary  discounts  of  ,£20,410,884.  The  most 
alarming  feature  of  the  bank's  affairs,  however,  was  loans  to 
four  firms  which  reached  an  aggregate  of  ,£1,603,725.  The 
character  of  the  bills  discounted  for  these  firms  is  shown  by 
the  fact  that  of  ,£402, 716  in  bills  of  Macdonald  ,£398,349 
were  dishonored  at  maturity,  and  the  results  for  the  other 
three  firms  were  only  a  little  better.  The  books  of  the  bank 
were  examined,  soon  after  the  general  meeting  in  June, 
l857>  by  request  of  the  directors  and  it  was  found  that  bad 


THE   SCOTCH  BANKING  SYSTEM.  149 

debts  to  the  amount  of  ,£573,000  were  carried  as  good  assets 
and  that  the  advances  to  shareholders  amounted  to  ,£988,487. 
It  was  found  that  the  four  firms  to  which  such  immense  ad- 
vances had  been  made  had  been  dealing  in  accommodation 
paper  and  that  the  Macdonalds  drew  upon  124  acceptors,  of 
whom  only  37  had  been  inquired  about  and  21  were  reported 
as  extremely  bad.  The  banks  stopped  the  accounts  of  these 
firms,  which  immediately  failed,  and  a  panic  resulted  on 
the  Stock  Exchange  on  October  loth.  Depositors  began  to 
withdraw  their  accounts,  the  bank  was  unable  to  settle  its 
balances  through  the  clearing  house  and  on  Monday,  No- 
vember gth,  closed  its  doors. 

The  collapse  of  the  City  of  Glasgow  Bank  in  1878  was 
similar  in  its  character  to  that  of  the  Western  Bank  twenty- 
one  years  earlier  and  was  due  to  similar  causes.  The  City 
of  Glasgow  Bank  was  compelled  to  stop  temporarily  in  1857 
and  continued  to  be  suspected  of  reckless  management  from 
that  time  until  its  failure.  The  institution  had  fallen  into 
such  discredit  early  in  1878  that  the  bill  brokers  generally 
asked  and  received  an  extra  quarter  or  half  of  one  per  cent, 
over  the  market  rate  charged  other  banks  in  discounting  its 
acceptances.1  Distrust  finally  came  to  a  head  in  September, 
1878,  when  the  Condon  banks  found  increasing  difficulty  in 
getting  rid  of  acceptances  sent  them  by  their  correspondents 
in  India  and  ordered  their  agents  in  the  Hast  to  buy  no  more 
such  paper.  The  directors  of  the  City  of  Glasgow  Bank 
appealed  to  the  other  Scotch  banks  for  help  towards  the  close 
of  the  month  and  an  expert  accountant  was  set  to  work 
upon  their  books.  A  slight  examination  showed  that  nearly 
,£6,000,000  had  been  lent  to  four  firms  and  that  the  books 
had  been  deliberately  falsified  for  not  less  than  three  years. 
The  other  banks  declined  to  give  any  assistance  and  the 
City  of  Glasgow  Bank  stopped  payments  on  Wednesday, 
October  2d.  The  news  was  received  very  quietly  in  Scot- 
land and  the  other  Scotch  banks  announced  that  the  notes  of 
the  failed  bank  would  continue  to  be  accepted  as  usual. 
They  also  made  an  arrangement  by  which  relief  was  given 

1  Gilbart,  II.,  400. 


150         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

to  depositors  who  were  hampered  by  the  locking  up  of  their 
money  pending  the  settlement  of  the  bank's  affairs. 
.  The  heaviest  burden  of  loss  fell  upon  the  shareholders, 
whose  liability  was  unlimited  under  the  law  then  in  force. 
The  liquidators  were  compelled  to  institute  a  number  of  suits 
to  fasten  the  liability  fully  upon  the  shareholders  and  to 
defeat  attempts  to  transfer  stock.  Having  adjusted  the  list, 
they  made  a  call  for  ,£500  for  every  ,£100  of  stock  held,  and 
subsequently  made  another  call  for  ,£2250  per  share  of  ,£100. 
The  result  of  the  first  call,  of  which  the  nominal  amount 
was  ,£4,200,000,  resulted  in  receipts  of  ,£2,409,066  at  the 
end  of  the  second  year  of  the  liquidation,  October  22,  1880. 
The  nominal  amount  of  the  second  call  was  ,£7, 8 14,000,  upon 
shareholders  who  were  still  solvent,  and  the  amount  realized 
was  £3,405,452.  The  result  of  these  two  calls,  with  a  sum 
of  ,£5,851,657  realized  from  the  assets,  enabled  the  payment 
of  seventeen  shillings  in  the  pound  within  less  than  two 
years  and  payment  in  full  was  made  within  little  more  than 
a  year,  with  the  help  of  an  advance  from  the  other  Scotch 
banks,  to  creditors  willing  to  forego  interest  on  their  claims. 
While  the  creditors  thus  lost  almost  nothing,  the  great 
majority  of  the  shareholders  were  absolutely  ruined.  The 
majority  expressed  their  purpose  at  the  first  meeting  on 
October  22,  1878,  to  keep  faith  with  their  creditors,  and  they 
kept  the  pledge  so  well  that  when  the  two  calls  had  been 
made  the  holders  of  only  ,£88,722  out  of  the  capital  of 
;£i,ooo, ooo  remained  solvent.  Criminal  proceedings  for  the 
falsification  of  the  books  wrere  begun  against  the  directors 
and  they  were  given  short  terms  of  imprisonment. 

The  narrative  of  the  transformation  of  the  unlimited 
banks  of  Great  Britain  into  limited  companies  relates  to 
English  banking  so  far  as  it  affects  some  of  the  great  English 
joint  stock  banks,  but  it  belongs  more  properly  to  the  history 
of  Scotch  banking  in  its  origin  and  in  its  relations  with  im- 
portant banks  of  issue.  The  agitation  of  the  subject  was 
the  direct  result  of  the  terrible  losses  suffered  by  the  stock- 
holders of  the  City  of  Glasgow  Bank  because  of  their  unlim- 
ited liability  for  the  obligations  of  the  bank.  The  law  of 


THE   SCOTCH  BANKING   SYSTEM.  I$I 

England,  which  prevailed  in  Scotland  after  the  union,  pre- 
sumed and  enforced  unlimited  liability  upon  corporations 
except  in  the  cases  where  special  charters  had  been  granted. 
There  was  much  opposition  to  extending  the  principle  of 
limited  liability  to  private  partnerships,  but  a  statute  of 
1855  (Chapter  133)  finally  authorized  the  formation  of  joint 
stock  companies  under  such  conditions.  Joint  stock  banks 
were  excluded  from  the  operation  of  this  law  and  the  exclu- 
sion was  continued  in  the  joint  stock  banking  act  of  1857. 
The  failures  of  that  year  led  to  an  enactment  of  1858,'  which 
admitted  banks  to  the  privileges  of  limited  liability  so  far  as 
concerned  their  general  obligations.  Banks  issuing  promis- 
sory notes,  however,  were  liable  for  the  amount  of  the  notes, 
without  limitation,  in  addition  to  the  sum  for  which  they 
might  be  liable  to  general  creditors.  This  act  was  merely 
permissive  and  required  banking  companies  which  took 
advantage  of  it  to  give  thirty  days'  notice  to  each  customer 
and  after  registering  under  the  act  to  post  conspicuously  at 
their  offices,  on  February  ist  and  August  ist  of  each  year,  a 
statement  of  their  liabilities  and  assets. 

The  Act  of  1858  would  have  averted  the  hardships  of  the 
stockholders  in  the  City  of  Glasgow  Bank  if  they  had  taken 
advantage  of  its  provisions  before  the  failure.  The  three 
older  Scotch  banks,  however,  held  special  charters  which 
limited  their  liability  and  the  others,  aside  from  the  natural 
indisposition  to  revise  their  constitutions,  feared  that  the 
effect  would  be  injurious  to  their  credit.  Thus  matters 
remained  until  the  collapse  of  the  City  of  Glasgow  Bank. 
Investments  in  bank  shares  were  recognized  by  the  law 
courts  in  Scotland  as  a  legitimate  investment  of  trust  funds, 
but  the  trustees  were  personally  liable  for  the  calls  made  by 
the  banks  as  well  as  to  their  clients,  and  many  were  ruined 
by  the  failure.  A  steady  selling  of  shares  began  all  over 
England  and  Scotland,  by  the  prudent  as  well  as  those  who 
were  carried  away  by  the  flurry  of  the  moment.2  The  shares 
of  the  three  senior  Scotch  banks  declined  about  ^55  on  an 

1  Statute  1858,  c.  91. 

2  Gilbart,  II.,  433. 


I$2          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

average,  while  the  shares  of  the  unlimited  banks  fell  about 

£99. 

The  subject  of  permitting  banking  with  limited  liability 

under  different  conditions  from  those  imposed  by  the  Act  cf 
1858  wras  brought  up  in  Parliament  and  the  government  on 
April  21 ,  1879,  introduced  a  bill  for  the  purpose.  The  act  be- 
came law  '  after  a  good  deal  of  controversy  and  authorized  the 
increase  of  capital  stock  by  an  amount  equal  to  existing  shares 
or  some  multiple  of  their  value,  and  liable  to  be  called  up 
only  in  case  the  company  was  wound  up.  This  constituted  a 
reserve  liability,  which  placed  a  definite  fund  within  the 
reach  of  a  failed  bank  without  requiring  assessments  upon 
the  shareholders  to  the  full  amount  of  the  liabilities.  The 
principal  of  unlimited  liability  was  retained  in  regard  to 
note  issues  by  corporations  whose  original  charters  were 
unlimited.  Most  of  the  leading  English  banks  and  the 
unlimited  Scotch  banks  soon  registered  under  the  new  law. 
It  was  feared  that  the  adoption  of  limited  liability  would 
result  in  a  reduction  of  deposits,  but  this  fear  was  discovered 
to  be  unfounded  and  deposits  materially  increased  in  the 
limited  banks  within  the  next  few  years.  The  banks  gener- 
ally adopted  the  policy  of  increasing  their  reserve  funds  by 
setting  aside  a  part  of  the  profits,  but  the  reserve  funds 
themselves  are  a  source  of  profit  in  the  revenue  derived  from 
the  securities  in  which  they  are  invested.  It  was  found, 
moreover,  by  some  of  the  English  joint  stock  banks  that  a 
better  class  of  shareholders,  of  undoubted  responsibility,  were 
attracted  by  the  limited  principle  where  men  of  straw  with- 
out other  visible  assets  had  begun  to  acquire  title  to  the 
stock  when  the  liability  was  unlimited.2 

The  three  senior  Scotch  banks  possessed  the  privilege  of 
limited  liability  in  respect  to  both  note  issues  and  general 
liabilities.  They  desired  in  1881  to  increase  their  capital  and 
to  issue  additional  stock  under  the  conditions  of  the  limited 
companies.3  The  bills  which  they  proposed  were  at  first 

1  42  and  43  Victoria,  c.,  76. 

2  London  Bankers'  Magazine,  June,  1892,  LIU.,  897. 

3  The  chartered  banks  had  occasion  to  point  out,  in  the  course  of 


THE   SCOTCH  BANKING  SYSTEM.  153 

favorably  received  in  Parliament,  but  after  passing  a  second 
reading  in  the  House  of  I/ords  were  opposed  by  the  govern- 
ment. Conferences  and  correspondence  ensued  which 
brought  out  some  rather  startling  statements  as  to  the  policy 
of  the  government  towards  the  Scotch  note  issues.  Several 
of  the  objections  made  to  the  proposed  bills  were  completely 
demolished  by  the  representatives  of  the  banks,  and  the 
government  several  times  shifted  their  position.  The  gov- 
ernment at  first  objected  to  legislation  by  private  bill  and 
suggested  that  the  grant  of  new  privileges  in  recent  years  to 
corporations  had  been  accompanied  by  a  review  of  those 
already  possessed.  They  declared  they  were  determined  to 
oppose  the  grant  of  new  powers  if  the  three  banks  continued 
to  ask  for  them  accompanied  by  limited  liability  for  notes. 
The  banks  promptly  offered  to  cover  their  note  issue  by 
government  securities  to  the  amount  of  the  circulation 
authorized  by  the  Act  of  1845  and  by  coin  to  the  amount  of 
the  excess.  The  government  then  suddenly  forgot  their 
solicitude  for  the  security  of  the  circulation  and  intimated 
that  they  would  give  the  banks  a  lease  of  the  right  of  note 
issue  for  a  fixed  term,  subject  to  a  moderate  royalty. 

This  was  an  important  indication  of  public  policy,  for  it 
grew  out  of  the  theory  that  the  right  of  note  issue  was 
peculiarly  an  attribute  of  the  state.  It  was  based  upon  a 
measure  dealing  with  English  banks  of  issue  which  had 
been  brought  before  Parliament  by  Lord  Palmerston  in  1865, 
but  never  became  law.  The  government  emphasized  their 
leaning  towards  state  note  issues  by  an  alternative  proposi- 
tion which  they  submitted, — that  the  banks  join  them  in 
considering  the  terms  upon  which  a  state  issue  of  notes, 
conducted  through  the  agency  of  all  the  banks,  and  main- 
taining the  ;£i  circulation,  might  be  introduced  into  Scot- 
land in  place  of  the  existing  circulation.  The  banks  replied 

the  discussion  which  followed,  that  there  were  legal  difficulties  which 
were  almost  insuperable  against  extending  unlimited  liability  for  ex- 
isting note  issues  to  their  shareholders,  but  they  expressed  their  will- 
ingness to  adopt  other  safeguards  for  the  ultimate  redemption  of  the 
notes.— Gilbart,  II.,  448. 


154          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

at  length,  declining  these  propositions.  They  did  not  care 
to  take  a  lease  of  rights  which  they  declared  were  already 
theirs  and  had  been  exercised  under  express  grants  from  the 
Crown  or  from  Parliament  for  from  135  years,  in  the  case  of 
the  youngest,  to  186  years  in  the  case  of  the  oldest  of  the 
three  banks.  A  state  issue  of  notes,  they  declared,  would 
not  be  acceptable  to  the  people  of  Scotland,  who  would 
suffer  more  than  the  banks  from  the  closing  of  many  of  the 
branches  and  the  diminution  of  banking  facilities  which 
would  be  the  necessary  consequence. 

The  right  of  the  Scotch  banks  to  maintain  their  branches 
in  Kngland  became  a  subject  of  active  controversy  in  1875, 
when  Mr.  Goschen  introduced  a  bill  in  the  House  of  Com- 
mons prohibiting  such  branches.  The  National  Bank  of 
Scotland  had  established  a  L,ondon  branch  in  1865  and  the 
Bank  of  Scotland  in  1872,  and  Mr.  Goschen  himself  had 
carried  through  a  bill  permitting  the  Royal  Bank  to  do  so  in 
1 873.  It  was  the  opening  by  the  Clydesdale  Bank  of  branches 
in  Northern  England  which  aroused  the  hostility  of  the  Eng- 
lish banks.1  Mr.  Goschen's  bill  resulted  in  a  commission, 
which  made  no  recommendations,  and  the  matter  was  dropped. 
A  new  attempt  was  made  to  drag  the  limitation  upon  Scotch 
banking  into  the  limited  liability  act  of  1879.  It  was  em- 
bodied in  the  eighth  section  of  the  original  government  bill 
and  prohibited  limited  companies  from  establishing  branches 
outside  that  part  of  the  Kingdom  in  which  they  had  their 
head  offices.  The  Scotch  banks  were  immediately  up  in 
arms  against  this  provision  and  the  government  were  finally 
persuaded  to  abandon  it.  They  attempted  a  flank  move- 
ment, by  cutting  down  the  operations  of  the  bill  to  the  joint 
stock  banks  of  England,  entirely  excluding  Scotland  and 
Ireland.  This  was  to  defeat  one  of  the  most  important  pur- 
poses of  the  bill  and  the  friends  of  the  Scotch  banks  declared 
that  they  would  not  permit  it  to  pass  in  such  a  form.  The 
government  were  finally  compelled  to  give  way  and  permit 
its  passage  in  a  form  applicable  to  the  entire  United  King- 


1  Maclveod,  Theory  and  Practice  of  Banking,  II,  397. 


THE   SCOTCH  BANKING  SYSTEM.  155 

dom  and  without  any  limitations  upon  the  power  of  the 
Scotch  banks  to  establish  their  branches  in  London. 

The  essential  features  of  the  Scotch  system  of  banking 
have  been  freedom  of  note  issues,  the  use  of  small  notes,  and 
cash  credits.  The  great  achievements  of  the  system  with 
these  elements  may  be  summed  up  thus : 

1.  It   has   provided   Scotland   with   an  elastic   currency, 
adapted  to  the  condition  of  her  industries  and  adequate  in 
volume  to  their  changing  needs. 

2.  It  has  enabled  the  people  to  carry  on  numerous  com- 
mercial and  agricultural  transactions  for  which  they  could 
not  have  found  the  necessary  quantity  of  coin  and  has  econo- 
mized the  locking  up  of  capital  in  the  precious  metals. 

3.  It  has  made  the  use  of  notes  of  small  denominations 
familiar  and  popular  and  has  taught  the  people  the  distinc- 
tion between  bank-notes  as  the  representatives  of  credit  and 
the  precious  metals  as  the  measures  of  value. 

4.  It  has  brought  into  active  use  the  available  savings  and 
capital  of  the  country. 

5.  It  has  afforded  an  opportunity  for  entering  upon  busi- 
ness to  thousands  of  poor  but  honest  men  and  enabled  them 
to  lay  the  foundation  of  a  comfortable  home  and  in  many 
cases  of  a  fortune. 

6.  It  has  convinced  the  people  so  conclusively  of  the  value 
and  safety  of  the  banking  currency  system  that  no  serious 
panic  has  ever  lasted  beyond  a  few  days  or  has  ever  affected 
any  of  the  banks  except  those  which  were  justly  the  subject 
of  distrust. 

I.  The  first  proposition,  that  the  Scotch  banking  system 
has  provided  the  country  with  an  elastic  and  adequate  cur- 
rency, is  strictly  applicable  only  to  the  period  between  1765, 
when  payment  of  notes  on  demand  was  made  obligatory  by 
law,  and  1845,  when  the  volume  of  authorized  circulation 
was  arbitrarily  limited.  The  limitation  imposed  in  1845 
could  not  be  seriously  objected  to  at  that  time,  because  it  left 
the  authorized  circulation  at  the  amount  then  existing.  The 
moderate  demands  of  changing  seasons  for  an  increased  vol- 
ume of  circulation  could  easily  be  met  by  issues  of  notes 


156          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

against  coin,  since  it  would  be  highly  improbable  and  impru- 
dent that  any  bank  should  be  without  a  small  supply  of  coin 
which  might  be  made  available  for  such  a  purpose.  This 
view  of  the  matter  is  based,  however,  upon  the  theory  that 
the  population  and  trade  of  Scotland  were  to  remain  station- 
ary or  to  decline,  as  actually  happened  to  the  population  of 
Ireland.  An  advancing  population  and  volume  of  trade 
must  gradually  feel  the  fetters  cramping  the  flesh  of  com- 
merce and  this  has  been  to  some  extent  the  experience  of 
Scotland.  ' '  The  only  effect  of  this  law, ' '  upon  the  banks, 
according  to  M.  Courcelle-Seneuil,  "has  been  to  limit  their 
productive  power,  in  condemning  them  to  keep  in  reserve  a 
considerable  sum  without  necessity."  '  Protests  against  the 
operation  of  the  Act  of  1845  have  been  frequently  made  by 
the  Scotch  chambers  of  commerce  and  experience  has  seemed 
to  justify  the  early  criticism  of  Mr.  Gilbart,  "that  restric- 
tions upon  banks  are  taxes  upon  the  public. ' '  a  But  Scot- 
land had  already  passed  the  point  in  1845  where  free  banking 
was  of  supreme  importance  to  her  industrial  development. 
Limitations  upon  her  circulation  might  hamper  the  opera- 
tions and  reduce  the  profits  of  the  banks,  but  they  could  not 
unlearn  the  lessons  in  saving  and  in  the  use  of  banking 
facilities  which  had  been  taught  by  a  century  of  free  banking. 
The  Scotch  circulation  has  continued  to  fluctuate  in  some 
degree  according  to  the  seasons,  the  lowest  point  being 
reached  in  March  and  the  highest  in  November.  The  ad- 
vance, however,  is  not  steady  from  March  to  November,  but 
rises  to  a  high  point  in  May  and  then  falls  slightly  until  the 
advance  sets  in  which  culminates  in  the  autumn.  May  and 
November  are  the  months  when  the  interest  on  mortgages  is 
usually  settled,  annuities  are  paid,  the  country  people  take 
the  interest  on  their  deposits,  and  servants  receive  their 
wages.  It  was  the  custom  during  the  first  half  of  the  pres- 
ent century  to  settle  all  such  transactions  by  bank-notes. 
This  made  it  easier  for  the  banks  to  keep  their  accounts  than 
under  the  system  of  drawing  odd  amounts  in  checks  ;  for  a 

1  Traite  des  Operations  de  Banque,  298. 

3  History,  Principles,  and  Practice  of  Banking,  II.,  217. 


THE   SCO  TCH  BA  NKING   S  YS  TEM.  I  5  7 

depositor  having  payments  to  make  would  draw  out  the  en- 
tire sum  in  notes,  would  receive  his  payments  during  the  day 
in  the  same  form,  and  would  deposit  the  net  proceeds  again 
in  one  sum  in  notes  at  the  close  of  the  day.  The  use  of 
checks  has  now  become  more  general,  but  does  not  prevent 
the  rise  and  fall  of  the  circulation  in  the  autumn  and  spring 
as  formerly.1 

The  elasticity  and  security  of  the  Scotch  circulation  are 
assured  by  the  daily  exchange  of  notes  through  the  Edin- 
burgh clearing  house.  The  settlements  for  notes  were  un- 
dertaken at  an  early  date  by  the  Bank  of  Scotland  and 
the  Royal  Bank,  on  each  alternate  month  and  are  made  by 
exchange  drafts  on  L,ondon.  A  bank  which  cannot  meet 
the  test  of  these  settlements  is  driven  to  suspension,  as 
happened  to  the  Western  Bank  in  1857.  The  daily  ex- 
changes by  notes  are  the  great  regulator  of  the  paper  cur- 
rency and  by  their  means,  according  to  the  admission  of 
one  of  the  most  radical  opponents  of  free  banking,  "  the 
average  circulation  of  Scotch  bank-notes  is  reduced  to  a  term 
of  a  few  days. ' ' a  Notes  which  are  not  demanded  by  the  con- 
venience of  trade  quickly  come  back  to  the  banks  as  deposits 
on  current  account  and  are  returned  through  the  exchanges 
to  the  issuing  bank  to  be  retired  and  cancelled. 

II.  The  proposition  that  the  banking  currency  of  Scotland 
has  enabled  her  people  to  carry  on  numerous  transactions 
for  which  they  could  not  well  have  found  the  necessary 
quantity  of  coin,  was  abundantly  demonstrated  by  the  testi- 
mony before  the  committees  of  Parliament  which  made  re- 
ports upon  the  subject  in  1826.  The  Act  of  1845  was  not 
successful,  according  to  Mr.  Gilbart,  "in  imparting  to  the 
people  of  Scotland  a  taste  for  gold."  The  circulation  of 
notes,  with  the  profit  which  the  banks  derived  from  circula- 
tion, was  necessary  to  maintain  the  existing  banking  system 
and  afford  accommodation  to  the  Scotch  people.  The  banks 
have  never  issued  the  gold  except  upon  demand  or  for  spe- 
cial purposes.  When  it  has  become  necessary  to  increase 

1  Gilbart,  IT.,  207,  216. 

3  Wolowski,  La  Banque  d'Angleterre,  etc.,  515. 


158          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

the  circulation  beyond  the  limit  imposed  by  the  gold  in 
hand,  they  have  quietly  brought  the  gold  from  London  to 
Edinburgh  and  kept  it  locked  up  in  the  vaults  of  the  bank 
until  the  necessity  for  it  was  at  an  end.  The  amount  of 
gold  kept  in  the  Scotch  banks  prior  to  the  legislation  of 
1845  was  but  a  small  percentage  of  their  obligations,  but 
was  large  enough  to  maintain  their  solvency  and  supply  the 
yellow  metal  when  demanded  for  export  or  other  special 
uses.  The  specie  holdings  for  the  four  weeks  ending  Janu- 
ary 3,  1846,  just  after  the  act  took  effect,  were  only  ,£1,180,. 
406,  or  less  than  half  a  pound  sterling  per  capita,  against  a 
circulation  of  ,£3,336,409.  The  specie  had  increased  for  the 
four  weeks  ending  March  5,  1864,  to  ,£2,337,459  against  a 
circulation  of  ,£3,996,743  ;  and  for  the  four  weeks  ending 
October  5,  1895,  to  ,£5,521,437  against  a  circulation  of 
,£7,054, 197. 

III.  The  use  of  small  notes  has  also -been  of  enormous 
advantage  to  the  people  of  Scotland,  and  has  produced  none 
of  the  dangerous  results  to  the  stability  of  the  currency 
which  have  sometimes  been  predicted  in  other  countries 
when  small  notes  have  been  proposed.  The  benefits  of 
issuing  notes  for  ,£1  were  fully  set  forth  in  the  testimony 
before  the  committees  of  the  two  houses  of  Parliament  in 
1826.  Mr.  Robert  Paul,  the  Secretary  to  the  Commercial 
Bank,  summed  up  some  of  the  evils  of  abolishing  small  notes 
by  declaring  that  it  would  require  the  reduction  of  the  num- 
ber of  branches,  because  of  the  increased  expense  in  the 
transmission  of  gold  ;  the  withdrawal  of  cash  accounts,  be- 
cause they  would  no  longer  accomplish  the  end  for  which 
they  were  granted, — the  maintenance  of  the  small  note  cir- 
culation and  the  profits  derived  from  it  by  the  banks  ;  and 
the  reduction  of  the  rate  of  interest  paid  on  deposits,  because 
it  would  be  necessary  to  keep  a  very  large  stock  of  gold  and 
to  keep  it  wholly  unproductive. 

A  letter  written  by  an  agent  of  the  Renfrewshire  Bank  at 
Greenock  to  the  manager,  Mr.  Roger  Aytoun,  set  forth  in 
an  even  more  striking  manner  the  absolute  paralysis  which 
would  fall  upon  many  transactions  by  the  adoption  of  a  gold 


THE  SCOTCH  BANKING  SYSTEM.  159 

currency  and  the  abolition  of  notes  under  £$.  Cattle  dealers 
in  the  country  markets,  he  pointed  out,  often  purchased  two 
or  three  hundred  beasts,  reaching  an  aggregate  value  of 
several  hundred  pounds,  but  they  purchased  them  by  the 
single  animal,  at  a  price  ranging  from  £2  to  ^4,  from  the 
farmers  who  brought  them  to  market.  It  would  be  neces- 
sary, if  £i  notes  were  abolished,  for  them  to  come  to  market 
loaded  with  gold  and  silver,  and  the  difficulty  of  obtaining  it 
from  the  banks  would  be  increased  by  the  fact  that  the 
banks  derived  no  profit  from  its  circulation.  Grain  was 
bought  up,  it  was  pointed  out,  in  much  the  same  manner 
and  the  herring  fisheries,  which  often  amounted  at  L,ochfine 
alone  to  the  value  of  ^"40,000  in  a  single  season,  were 
brought  in  by  a  thousand  boats,  whose  catch  for  a  night  was 
generally  under  ^5.  "  If  small  notes  are  superseded,  and 
gold  substituted,"  continued  the  letter,  "it  is  not  easy  to 
see  how  the  supply  of  gold  is  to  be  kept  up  to  carry  on  the 
business  and  transactions  of  this  country.  Should  a  quan- 
tity of  it  be  received  into  the  circulation,  it  would  not  re- 
main long,  but  find  its  way  into  the  banks,  who  will  not 
again  give  it  out  in  bills  as  they  do  their  notes,  and  it  will 
immediately  become  a  scarce  article  in  the  country.  A  per- 
son, then,  having  to  pay  in  small  sums,  will  on  every  such 
occasion  be  obliged  to  send  his  large  notes  to  the  bank  that 
issued  them,  perhaps  a  hundred  miles  off,  to  receive  gold 
and  silver  in  their  place,  to  answer  his  purpose."  The  evi- 
dence was  so  overwhelming  of  the  value  of  the  small  note 
system  that  even  Sir  Robert  Peel  and  the  extreme  advocates 
of  the  currency  principle  were  convinced  of  the  serious  in- 
jury which  its  abolition  would  do  in  Scotland  and  both  the 
committees  of  the  L,ords  and  the  Commons  recommended 
the  postponement  of  the  measure. 

IV.  The  fourth  advantage  of  the  Scotch  currency  system, 
that  it  has  brought  into  active  use  the  available  savings  and 
capital  of  the  country,  is  due  to  the  system  of  allowing  inter- 
est on  deposits.  This  is  hardly  practicable  except  under 
freedom  of  note  issues,  because  no  other  system  would  afford 
the  banks  sufficient  profit  to  pay  a  rate  of  interest  attractive 


l6o          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

to  capital.  The  early  regulations  permitted  deposits  for  any 
amount  above  ^10,  subject  to  withdrawal  at  the  will  of  the 
depositor  and  bearing  interest  from  the  day  of  deposit  until 
the  day  of  withdrawal.  This  system  was  supplemented  by 
the  provident  banks,  which  received  deposits  of  small  sums 
until  they  amounted  to  ^10.  It  was  the  ambition  of  the 
Scotch  domestic,  fisherman,  and  agricultural  laborer  to  ac- 
cumulate enough  for  a  bank  deposit  during  a  half  year  or  a 
year  and  add  it  to  the  principal  and  interest  which  he  had 
already  earned.  When  this  sum  accumulated  sufficiently  to 
enable  the  depositor  to  buy  or  build  a  house,  or  to  set  up 
as  a  master  in  the  trade  in  which  he  had  been  a  servant,  it 
would  be  drawn  in  bank-notes,  which  would  continue  to  afford 
profit  to  the  bank  until  returned  by  some  other  depositor. 
The  system  thus  stimulated  greatly  the  frugality  and  savings 
of  the  poor,  and  did  much  to  accumulate  in  Scotland  a  capi- 
tal capable  of  developing  her  agriculture  and  manufactures.1 
It  has  not  been  merely  as  savings  banks,  however,  that 
the  Scotch  banks  have  contributed  to  bring  into  the  circle 
of  active  industry  the  entire  capital  of  the  country.  The 
wide  diffusion  of  branches  under  the  Scotch  banking  system 
places  a  bank  account  within  the  reach  of  every  small  trader. 
The  result,  in  connection  with  the  interest  allowed  on  de- 
posits, has  been  to  create  a  much  greater  number  of  deposit 
accounts  from  small  tradesmen  than  in  any  other  country. 
The  facility  of  banking  and  the  advantage  of  earning  inter- 
est have  tempted  the  Scotch  tradesman  to  keep  his  spare  cash 
in  hand  at  the  lowest  minimum  and  to  deposit  his  entire  sur- 
plus in  the  bank.  The  payment  of  interest  thus  acts  as  a 
direct  check  upon  excessive  issues  by  bringing  the  notes 
back  to  the  bank  for  deposit.  The  advocates  of  the  Scotch 

1  The  proof  of  the  large  savings  of  the  Scotch  people  and  their  gen- 
eral use  of  banking  facilities  may  be  found  in  the  bank  returns  for  the 
United  Kingdom  for  1894  published  near  the  close  of  Chapter  V. 
These  returns  show  that,  in  spite  of  the  enormous  wealth  and  bank- 
ing business  concentrated  in  the  City  of  London,  the  deposit  liabilities 
of  the  Scotch  banks,  divided  by  the  population  of  Scotland,  show  a 
per  capita  average  of  about  ^27,  while  those  of  England  subjected  to 
a  like  process  show  an  average  of  about  £22. 


THE   SCOTCH  BANKING  SYSTEM.  l6l 

banking  system  blame  the  English  banks  for  their  failure  to 
invite  the  available  capital  of  the  country  into  their  coffers 
by  the  payment  of  interest.1  If  a  Scotch  banker  issues  a 
quantity  of  notes,  he  feels  assured  that  nearly  all  of  them 
will  be  paid  into  some  bank  in  the  course  of  the  day.  There 
was  a  competition  among  issuers,  before  the  Act  of  1845, 
but  it  was  under  the  restraint  of  the  theoretical  rule  of  free 
banking,  that  the  notes  come  back  to  the  bank  whenever 
they  are  issued  in  excess.  Many  of  the  Knglish  banks, 
however,  have  discouraged  deposits  and  active  accounts  by 
charging  a  commission  when  the  accounts  were  operated 
upon. 

Deposit  accounts  and  the  payment  of  interest  have  thus 
operated  at  once  to  bring  within  the  circle  of  productive  in- 
dustry every  possible  fraction  of  available  capital,  but  they 
have  operated  also  to  apply  constantly  to  the  banks  the 
touchstone  of  a  sound  and  scientific  currency, — the  redemp- 
tion and  cancellation  of  their  notes.  These  results  could  not 
be  accomplished  by  a  great  state  institution  or  without  the 
wide  diffusion  of  banks  or  their  branches.  The  ten  Scotch 
banks  of  issue  have  now  over  900  offices  or  branches,  or  an 
office  for  every  4500  people,  men,  women,  and  children.  The 
methods  by  which  they  have  accomplished  such  results, 
moreover,  are  not,  in  the  language  of  M.  Courcelle-Seneuil, 
"  the  exercise  of  a  blind  routine,  the  setting  in  motion  of  a 
sort  of  mechanism  ;  they  have  been  the  employment  of  an 
enlightened  judgment  in  their  loans,  the  exercise  of  a  high 
intelligence  applied  to  business."  The  Scotch  system  of 
branches  results  in  an  even  distribution  of  capital  by  with- 
drawing it  from  points  where  it  is  not  needed  and  concentrat- 
ing it  where  it  is  needed.  The  branches  in  the  agricultural 
districts  usually  accumulate  more  capital  than  is  needed 
within  their  own  circuits  and  transfer  it  to  the  manufactur- 
ing districts,  which  are  able  to  employ  nearly  all  the  capital 
they  can  obtain.  This  system  kept  capital  within  the  coun- 
try and  the  payment  of  interest  on  deposits  contributed  to 
deter  the  Scotch  people  from  the  reckless  investments  which 


1  Gilbart,  II.,  211. 

XI 


1 62          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

have  absorbed  so  many  millions  of  English,  French,  and 
American  money. 

It  was  predicted,  when  the  regulation  of  note  issues  was 
applied  to  the  Scotch  banks  in  1845,  that  the  result  would  be 
the  reduction  of  the  interest  paid  on  deposits,  and  this  pre- 
diction has  been  verified  by  events.  A  part  of  this  reduction 
has  undoubtedly  been  due  to  the  accumulation  of  capital 
and  the  fall  in  its  price  in  the  money  markets  of  the  world, 
but  a  part  is  due  to  the  increased  cost  of  banking  under  the 
Act  of  1845.  A  radical  departure  was  taken  from  the  old 
methods  of  Scotch  banking,  when  the  banks  by  a  circular  of 
October  i,  1892,  gave  notice  that  after  that  date  the  allowance 
of  interest  on  creditor  balances  of  current  accounts  would  be 
discontinued.1  No  distinction  was  made  in  regard  to  the 
rate  of  interest,  at  the  time  of  the  Act  of  1845  and  for  some 
years  after,  between  deposit  accounts  and  credit  balances  of 
current  accounts.  The  rate  allowed  was  the  same  on  the  two 
classes  of  accounts  and  seldom  fell  so  low  as  two  per  cent. 
The  rate  in  force  on  deposits  for  several  years  was  one  and  a 
half  per  cent,  and  this  wras  reduced  in  January,  1895,  to  one 
per  cent.  These  low  rates  have  destroyed  much  of  the 
motive  for  depositing  idle  capital  in  the  banks,  and  have 
driven  the  Scotch  people  to  send  their  money  to  Australia 
and  seek  other  and  less  secure  investments  than  those  which 
they  formerly  obtained  at  home  by  simply  depositing  their 
surplus  in  their  current  accounts  with  the  banks. 

V.  The  fifth  great  advantage  of  the  Scotch  banking  sys- 
tem, that  it  has  afforded  an  opportunity  for  entering  upon 
business  to  thousands  of  poor  but  honest  young  men,  is  due 
chiefly  to  the  system  of  cash  credits.  The  Royal  Bank 
found,  soon  after  its  organization,  that  it  had  more  capital 
than  it  could  employ  in  ordinary  commercial  operations  on 
bills  of  exchange  within  the  narrow  circle  of  Scotch  com- 
merce. The  result  was  the  adoption  of  the  system  of  cash 
credits  for  the  promotion  of  agriculture  and  industry.  The 
system  consists  in  giving  an  open  credit,  or  drawing  account, 
to  a  customer  who  is  vouched  for  by  two  or  more  trustworthy 

1  London  Bankers'  Magazine,  April,  1893,  LV.,  577. 


THE   SCOTCH  BANKING   SYSTEM.  163 

persons.  A  cash  credit  of  ^100  authorizes  the  person  in 
whose  favor  it  is  granted  to  draw  upon  the  bank  for  that 
amount,  but  he  is  not  usually  expected  to  draw  the  entire 
sum  at  once  and  is  charged  with  interest  only  on  the  amount 
actually  drawn  and  not  repaid  at  any  given  time.  The  sys- 
tem differs,  therefore,  from  the  discounting  of  a  bill  of  ex- 
change in  the  fact  that  the  money  can  be  drawn  piece-meal 
instead  of  in  bulk  and  interest  is  charged  only  upon  the  por- 
tion of  the  loan  actually  outstanding.  If  payments  are  made 
from  time  to  time  into  the  bank,  they  are  credited  and  the 
interest  charged  is  reduced.  The  persons  who  vouch  for  the 
holder  of  the  cash  credit  are  called  cautioners  or  sureties. 

A  cash  credit,  therefore,  is  in  the  nature  of  permission  to 
overdraw  an  account  up  to  a  fixed  limit.  Cash  credits  are 
rarely  given  for  sums  below  ^100  and  generally  range  from 
^200  to  ^500.  The  banks  prefer  these  small  sums,  but 
sometimes  grant  such  credits  for  ^icoo  or  even  larger  sums. 
Payments  upon  these  credits  are  made  in  the  notes  of  the 
bank,  which  are  thus  kept  in  active  circulation.  Such  a 
credit  is  not  allowed  to  lapse  into  a  dead  loan  of  the  aggre- 
gate amount,  but  it  is  expected  that  payments  will  inter- 
mingle with  drafts  upon  it.  It  is  intended  as  a  working 
capital  for  men  of  good  character  engaged  in  trade  or  agri- 
culture. It  has  the  advantage  over  the  ordinary  method  of 
loans  by  discount,  not  only  that  it  is  more  economical  to  the 
borrower,  but  that  it  keeps  within  the  control  of  the  bank 
all  sums  not  in  active  business  use.  The  holder  of  a  cash 
credit  is  not  only  benefitted  by  paying  into  his  account  all  the 
cash  which  he  may  receive  from  day  to  day,  but  he  reduces 
the  bank's  outstanding  loans  by  that  amount  and  enables  it 
to  increase  them  in  other  directions. 

The  advantage  of  this  system  to  Scotch  industry  has  been 
incalculable,  measured  not  only  in  shillings  and  pounds  to 
the  borrower,  but  in  the  stimulus  which  it  has  given  to  the 
thrift,  frugality,  honesty,  and  morality  of  the  people.  The 
two  cautioners  keep  an  eye  upon  the  young  man  for  whom 
they  have  vouched,  have  a  right  to  know  the  state  of  his  ac- 
counts, and  if  they  find  that  his  business  is  badly  conducted, 


1 64          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

they  can  withdraw  their  security  and  authorize  the  bank  to 
call  in  the  loan.  The  losses  on  cash  credits  have  been  tri- 
fling throughout  the  entire  history  of  Scotch  banking.  Cash 
credits  have  been  granted  to  manufacturers  and  large  employ- 
ers and  to  the  trustees  of  great  public  works,  as  well  as  to 
young  men  setting  up  in  business  and  to  farmers  desiring 
money  in  anticipation  of  the  sale  of  their  crops.  Many  dis- 
tinguished Scotch  manufacturers  have  testified  that  the  sys- 
tem of  cash  credits  was  the  foundation  of  their  success  in 
life.  Mr.  Monteith,  a  member  of  Parliament  who  testified 
before  the  Committee  of  the  House  of  Commons  in  1826,  de- 
clared that  he  was  then  a  manufacturer  employing  4000 
hands  and  that,  except  for  the  merest  trifle  of  capital  which 
was  lent  to  him,  and  which  he  soon  paid  off,  he  began  the 
world  with  nothing  but  a  cash  credit.  The  testimony  before 
the  same  committee  showed  that  upon  one  cash  credit  of 
^£500  there  were  operations  to  the  amount  of  ,£70,000  in  a 
single  year,  and  one  witness  stated  that  during  twenty-one 
years  in  a  country  bank  of  moderate  size  operations  took 
place  to  the  amount  of  ^90, 000,000  and  that  there  had  been 
but  one  loss  of  .£200  on  a  single  account  and  that  the  whole 
loss  of  the  bank  during  the  entire  period  did  not  exceed 

^1200.' 

VI.  The  confidence  which  has  been  produced  among 
the  Scotch  people  in  the  system  of  a  banking  currency  as 
maintained  by  their  banks  was  illustrated  in  a  remarkable 
manner  at  the  time  of  the  failures  of  the  Western  Bank  in 
1857  and  the  City  of  Glasgow  Bank  in  1878.  The  run  upon 
the  Western  Bank  began  on  Tuesday,  October  13,  1857,  and 
continued  for  three  days,  but  during  that  entire  period  the 
bank  paid  away  only  about  ^"36,000,  in  coin,  and  for  the 
entire  month  from  October  loth  to  November  7th  only 
^44,000.  Deposits  were  drawn  out  to  the  amount  of 
;£i,  280,000,  but  in  nearly  every  case  the  depositors  were 
willing  to  accept  the  notes  of  the  bank  and  when  it 
suspended  operations  the  notes  in  circulation  were  still 
,£720,000.  The  heaviest  pressure  upon  the  bank  came  after 

1  MacLeod,  Theory  and  Pratice  of  Banking,  I.,  347. 


THE   SCOTCH  BANKING  SYSTEM.  165 

the  announcement  that  it  would  receive  support  from  the 
other  Edinburgh  banks  on  condition  of  winding  up.  This 
pressure  came,  not  from  any  demand  for  gold,  but  from 
large  tradesmen  who  transferred  their  accounts  to  other 
banks  in  order  to  establish  banking  relations  for  the  future.1 
The  bank  was  unable  to  settle  the  heavy  exchanges  which 
were  thus  created  against  it  in  the  settlement  with  the 
associated  banks. 

It  was  not  until  Sunday,  November  8th,  that  the  other 
banks  resolved  to  refuse  the  notes  of  the  Western  Bank  in 
consequence  of  its  inability  to  settle  its  exchanges,  and  the  de- 
mand for  gold  became  more  marked  on  Monday  and  Tuesday. 
The  Western  Bank  closed  on  Monday  and  a  genuine  panic 
was  directed  for  a  day  and  a  half  against  the  City  of  Glasgow 
Bank,  because  it  had  been  guilty  of  the  same  negligence  as 
the  Western  Bank  regarding  the  keeping  of  its  reserve  in 
London.  The  bank  was  obliged  to  close  on  Wednesday, 
but  the  demand  for  gold  was  almost  entirely  confined  to 
depositors  and  very  few  note-holders  came  forward  to 
demand  payment  of  their  notes.  Large  remittances  of  gold 
arrived  from  London  on  Wednesday  and  Thursday,  the  run 
on  the  banks  ended  on  Wednesday  afternoon,  and  the  people 
seemed  to  retain  the  same  confidence  as  ever  in  the  other 
banks  and  received  the  notes  even  of  the  Western  Bank  when 
the  other  banks  agreed  to  again  receive  them.  When  the 
City  of  Glasgow  Bank  failed  in  1878,  it  was  only  necessary 
for  the  other  banks  to  announce  that  they  would  continue 
to  receive  its  notes,  as  usual,  to  put  an  end  to  all  uneasiness 
on  the  score  of  the  notes.  If  the  banks  on  these  occasions 
had  not  been  allowed  to  issue  notes,  the  entire  demand  for 


1  The  same  tendency  to  substitute  the  note  obligations  of  the  bank 
for  a  deposit  account  was  shown  in  British  North  America  after  the 
failure  of  the  Commercial  Bank  of  Manitoba  on  July  3,  1893.  The 
reason  in  this  case  for  preferring  notes  was  the  fact  that  they  were 
made  by  the  Canadian  banking  act  of  1890  a  perfectly  secured  first 
lien  upon  the  assets.  The  banks  receiving  these  notes  were  willing 
to  hold  them  for  a  time,  at  the  request  of  the  liquidator,  because  they 
bore  six  per  cent  interest  until  paid. — Breckenridge,  394-95. 


1 66  HISTORY  OF  MODERN  BANKS   OF  ISSUE. 

the  withdrawal  of  deposits  must  have  been  met  in  coin  and 
would  have  put  a  heavy  pressure  upon  the  coin  reserves. 
But  the  small  notes  were  readily  received,  the  deposit  ac- 
counts of  the  solvent  banks  were  not  assailed  and  the  Scotch 
banking  system  retained  as  completely  as  ever  the  confidence 
of  the  people. l 

1  M.  Horn  declares  that  the  three  elements  which  have  especially 
promoted  the  solidity  of  the  Scotch  banks  and  inspired  the  public 
confidence  have  been  their  large  capital ;  loyal  adherence  to  com- 
mercial banking,  without  complications  with  the  government ;  and 
the  system  of  exchange  of  notes,  which  established  a  sort  of  mutual 
supervision. — La  Liberte  des  Banques,  424. 


CHAPTER  VII. 

BANKING  IN  IRELAND. 

The  Effect  of  Political  and  Economic  Misfortunes— The  Early  Bankers 
and  the  Foundation  of  the  Bank  of  Ireland — The  Provincial  Bank 
and  Other  Banks  of  Issue — The  Collapse  of  the  Agricultural  and 
Tipperary  Banks — The  Act  of  1845  and  Present  Conditions. 

T  REL,AND  has  had  almost  as  varied  an  experience  in 
banking  as  in  the  political  fortunes  of  her  people  and 
her  banking  history  has  been  affected  more  or  less 
unfavorably  by  the  agitated  condition  of  the  country.  The 
policy  of  England  towards  Ireland  was  distinctly  selfish 
during  the  seventeenth  and  eighteenth  centuries.  Irish 
agriculture  was  crushed  by  the  importation  of  bounty-paid 
wheat  from  England  and  Irish  manufactures  were  stifled  by 
countervailing  duties  intended  to  prevent  their  competition 
with  English  goods.1  The  linen  trade  was  almost  the  only 
one  which  was  allowed  some  degree  of  prosperity,  upon 
the  theory  that  it  was  better  for  England  to  draw  her 
linen  supply  from  a  dependency  than  to  pay  foreign  coun- 
tries for  it.  This  policy  was  changed  from  1782  to  1800, 
while  Ireland  had  an  independent  parliament,  for  the  policy 
of  large  bounties  and  protective  duties,  and  for  a  brief  period 
Irish  industry  started  forward  by  leaps  and  bounds  under 
this  artificial  stimulus.  But  the  country  soon  felt  the  heavy 
cost  of  the  bounty  system  and  prosperity  began  to  decline 
before  the  union  with  Great  Britain.  The  economic  history 
of  Ireland  then  became  a  part  of  that  of  England,  and  a 
reasonable  degree  of  progress  was  made  up  to  the  time  of 

1  Cunningham,  II.,  298,  523. 

167 


1 68  HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

the  potato  famine  in  1846.  That  event  caused  a  loss  of  pop- 
ulation by  starvation  and  immigration  which  has  never  been 
recovered.  Absentee  landlordism  also  has  been  a  permanent 
source  of  loss  to  the  country  by  the  large  amount  of  produce 
and  money  annually  sent  abroad  in  payment  for  rents.  The 
fact  that  bank  deposits  have  increased  and  that  Ireland  has 
retained  within  her  limits  a  large  fund  of  gold  and  silver, 
in  spite  of  these  obstacles  to  her  progress,  is  high  evidence 
of  the  productive  and  thrifty  character  of  the  Irish  people 
and  the  sound  judgment  of  their  bankers. 

The  earliest  banking  in  Ireland  seems  to  have  been  done 
by  brokers  or  intermediaries,  who  brought  borrowers  and 
lenders  together  for  a  consideration.  The  business  of  issuing 
promissory  notes  against  deposits  of  coin  gradually  grew  up 
among  the  goldsmiths  and  tradesmen,  who  carried  it  on  in 
addition  to  their  regular  callings.  These  notes  were  given 
a  legal  status  as  negotiable  instruments  by  an  Act  of  1709, 
which  made  them  assignable  and  transferable  by  endorsement. 
There  were  no  banking  laws  to  prevent  fraud  and  failure, 
and  the  losses  by  the  failure  of  banks  or  exchangers  was 
estimated  as  early  as  1682  at  having  been  ^50,000  within  a 
few  years.1  The  Act  of  1709  gave  the  power  to  protest  in- 
land as  well  as  foreign  bills  and  promissory  notes  for  non- 
acceptance  or  non-payment.  The  Irish  House  of  Commons 
acted  as  a  court  of  bankruptcy  and  a  special  act  of  Parlia- 
ment was  necessary  for  the  liquidation  of  the  affairs  of  an 
insolvent  institution.  The  first  act  of  the  kind  on  record  is 
in  1721,  which  was  passed  for  the  relief  of  the  creditors  of 
Mead  and  Curtis,  a  Dublin  firm  which  had  suspended  on 
June  14,  1727.  A  bill  for  the  relief  of  Burton  and  Falkiner 
of  Dublin  was  passed  in  1733  but  the  final  legislation  re- 
garding the  affairs  of  this  firm  was  not  passed  until  1757. 
The  firm  had  acted  as  bankers  for  the  government  and  their 
failure  seems  to  have  been  due  to  their  large  holdings  of 
landed  property,  which  could  not  be  turned  into  cash  when 
needed. 

A  series  of  failures  took  place  in  1755  and  1756,  which  led 
17. 


BANKING  IN  IRELAND.  169 

to  the  appointment  of  a  select  committee  of  the  House  of 
Commons  to  make  an  inquiry.  They  reported  that  credit 
had  suffered  by  the  setting  up  of  persons  as  bankers  with- 
out sufficient  capital,  and  recommended  that  bankers  be 
required  to  register  the  real  and  personal  estate  which  they 
proposed  to  hold  as  security  for  the  payment  of  their  liabili- 
ties, that  the  names  of  the  issuing  bankers  be  stated  on  bank- 
notes, that  bankers  should  not  be  permitted  to  trade  as 
merchants,  and  that  it  should  be  made  a  felony  without 
benefit  of  clergy  for  cashiers  or  clerks  to  embezzle  money 
in  excess  of  ^50.  The  committee  also  recommended  the 
cancellation  of  notes  at  the  time  of  payment.  These  recom- 
mendations, except  that  regarding  the  registration  of  security, 
were  embodied  into  law  in  1755  (29  George  II.,  c.  16).  This 
act  did  not  entirely  revive  credit  and  four  important  banking 
failures  took  place  in  1758  and  in  1760.  The  first  was  that  of 
Clements,  Malone,  and  Gore,  a  firm  established  on  July  3, 
1758,  which  closed  its  doors  on  November  ist,  of  the  same 
year.  This  firm  issued  deposit  notes  payable  to  bearer  on 
seven  days'  notice  with  interest  at  the  rate  of  ten  pence  per 
week  for  every  ^100  (two  and  one-sixth  per  cent,  per  annum). 
The  deposits  obtained  were  larger  than  were  expected  and 
were  invested  largely  in  land,  but  the  depositors  soon  began 
to  demand  repayment  of  their  notes  and  as  cash  could  not 
be  obtained  the  firm  was  obliged  to  suspend. 1 

Three  of  the  six  large  banking  firms  in  Dublin  suspended 
in  1760  and  the  others  refused  to  discount  bills  and  practi- 
cally suspended  business.  Among  the  firms  which  remained 
solvent  was  that  of  Messrs.  I,a  Touche  and  Co. ,  which  began 
business  in  1725  and  survived  as  a  banking  house  until  its 
fusion  with  the  Munster  Bank  in  1878.  The  financial  con- 
dition of  the  country  and  the  state  of  credit  were  in  such  a 
situation  that  a  meeting  of  the  merchants  of  Dublin  was 
held  in  April,  1760,  which  made  an  appeal  to  Parliament  for 
relief.  A  committee  of  inquiry  was  named  by  the  House 
which  reported  on  April  23,  1760,  that  the  quantity  of  paper 
in  circulation  was  insufficient  to  carry  on  trade  and  manufac- 

1  Dillon,  23. 


I/O          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

tures,  and  recommended  support  for  the  three  surviving 
banks  to  the  amount  of  ,£50,000  each.  This  recommenda- 
tion was  adopted  and  the  notes  of  these  bankers  were 
received  as  cash  in  the  subscription  for  a  loan  which  was 
then  being  raised.  The  failure  of  Sir  George  Colebrook, 
Bart.,  and  Company,  London  bankers  who  had  opened  a 
branch  in  Dublin,  in  1764,  was  the  cause  of  another  panic 
in  1770  which  led  the  Lord  Lieutenant  and  some  of  the 
gentry  to  issue  a  notice  pledging  themselves  to  receive  the 
notes  of  the  existing  Dublin  bankers  without  question. 

The  effort  to  found  a  strong  joint  stock  bank  began  the 
year  after  the  foundation  of  the  Bank  of  England.  A  number 
of  the  principal  merchants  of  Dublin  held  a  meeting  in  1695 
and  presented  a  memorial  to  the  Irish  House  of  Commons 
on  September  i7th,  recommending  the  establishment  "  of  a 
public  bank  or  a  fund  of  credit,  for  the  encouragement  of 
trade,  and  supply  of  the  present  want  of  money."  The 
petition  was  referred  to  the  committee  on  trade,  but  was 
never  reported  upon.  The  matter  was  revived  in  1720  by 
Lord  Abercorn,  Lord  Boyne,  and  others,  who  petitioned  the 
King  for  authority  to  found  a  public  bank  with  a  capital  of 
,£500,000.  The  Lords  Justices  reported  in  favor  of  the 
scheme  and  the  King  authorized  the  Lord  Lieutenant  to 
grant  a  commission  and  charter.  The  consent  of  the  House 
of  Commons  was  required  for  a  proper  bill  and  the  early 
stages  were  favorably  passed.  Charges  of  jobbery  began 
to  be  made  against  the  promoters  of  the  bank,  a  rival  scheme 
was  started  with  a  capital  of  ,£1,000,000,  whose  promoters 
were  charged  with  paying  ,£50,000  to  members  of  the  House 
as  bribes,  and  the  outcome  was  the  passage  of  a  resolution 
on  December  9,  1721,  "  That  the  erecting  or  establishing  a 
public  bank  in  this  Kingdom  will  be  of  the  most  dangerous 
and  fatal  consequence  to  his  Majesty's  service  and  the  trade 
and  liberties  of  this  nation. ' '  Religious,  political,  and  finan- 
cial reasons  influenced  the  action  of  the  House,  but  a  stronger 
reason  was  probably  found  in  the  infringement  of  the  privilege 
of  originating  legislation,  which  they  jealously  guarded. 

The  plan  of  a  public  bank  remained  in  abeyance  until 


BANKING  IN  IRELAND.  I /I 

1782,  when  Ireland  obtained  a  new  constitution,  was  freed 
from  humiliating  tariff  restrictions  and  believed  herself  upon 
the  threshold  of  a  new  era  of  prosperity.  Mr.  Eden,  the 
Secretary  to  the  Lord  Lieutenant,  presented  the  heads  of  a 
bill  for  a  bank  on  February  27,  1782.  Some  opposition 
developed  among  the  existing  bankers  and  their  friends  in  the 
House  and  when  Mr.  Eden  called  the  bill  up  on  March  5th, 
the  opponents  of  the  bank  endeavored  to  secure  an  adjourn- 
ment, but  the  motion  was  lost  and  the  report  of  the  com- 
mittee was  agreed  to.  The  capital  of  the  bank  was  fixed  at 
600,000  Irish  pounds,1  of  which  no  person  was  to  subscribe 
more  than  ,£10,000,  and  which  was  to  be  lent  to  the  govern- 
ment at  four  per  cent.  The  charter  was  to  run  until  January 
T  ,  1 794,  and  until  twelve  months'  notice  of  withdrawal  and 
the  re-payment  of  all  sums  due  the  bank  by  the  government. 
The  bank  began  business  June  23,  1783,  and  as  early  as 
October  3ist,  of  the  same  year  Mr.  David  La  Touche,  Jr., 
was  able  to  inform  the  House  of  Commons  that  great  advan- 
tages had  resulted,  particularly  to  the  traders  in  linen.  The 
first  offices  of  the  bank  were  in  some  old  houses  in  Mary's 
Abbey,  but  after  the  union  of  Great  Britain  and  Ireland  in 
1802,  the  directors  of  the  bank  purchased  the  Parliament 
house  for  ,£40,000.  They  remodelled  it  to  meet  their  require- 
'-ments  and  established  the  bank  there  in  1808.  The  meet- 
ings of  the  directors  and  shareholders  are  held  in  the  old 
chamber  of  the  Lords  and  the  general  office  occupies  the 
old  House  of  Commons. 

The  new  institution  was  known,  in  similar  language  to 
that  establishing  the  Bank  of  England,  as  "The  Governor 
and  Company  of  the  Bank  of  Ireland,"  and  was  not  allowed 

1  The  coinage  of  Ireland,  although  bearing  the  same  names,  differed 
from  that  of  Great  Britain.  The  English  shilling  was  passed  in  Ire- 
land for  thirteen  pence,  although  twelve  Irish  pence  were  equal  to  a 
shilling  and  twenty  shillings  to  a  pound.  This  made  English  coins 
worth  about  eight  per  cent,  more  than  Irish  coins  of  the  same  names 
and  led  to  much  confusion  until  the  currencies  were  assimilated  by 
the  Ac^of  6  George  IV.,  c.  79,  making  the  currency  of  Great  Britain 
that  of  the  United  Kingdom  and  providing  for  the  interpretation  of 
contracts  in  its  terms. 


172          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

to  charge  more  than  five  per  cent,  interest  on  loans  and  dis- 
counts. If  the  bank  incurred  debts  to  a  greater  amount 
than  its  capital,  the  subscribers  were  answerable  in  their 
private  capacity  to  the  creditors  in  proportion  to  their  sub- 
scriptions. The  stock  was  to  be  transferable  and  to  be 
deemed  personal  estate,  and  as  such  to  go  to  the  executors 
of  the  holders  rather  than  their  heirs.  Fifteen  directors  were 
to  be  chosen  annually,  not  more  than  two-thirds  of  the  direc- 
tors of  the  preceding  3*ear  were  to  be  re-elected,  and  the 
corporation  was  to  have  a  governor  and  a  deputy  governor. 
The  charter  of  the  bank  was  renewed  in  1791  and  the  capital 
increased  to  ,£1,000,000.  Another  increase  of  ,£500,000  was 
made  in  1791,  and  still  another  increase  of  ,£1,000,000  was 
made  in  1808  by  48  George  III.,  c.  103.  The  charter  was 
extended  at  this  time  until  the  expiration  of  twelve  months' 
notice  after  January,  1837.  The  last  increase  of  capital 
was  made  in  1820,  when  the  total  was  fixed  at  ,£3,000,000 
in  Irish  currency  (equivalent  to  ,£2,769,231  in  English  cur- 
rency). This  last  increase  was  taken  from  the  surplus  fund 
of  the  bank  and  lent  to  the  government,  making  the  aggre- 
gate loans  to  this  date  ,£2,630,769  in  English  currency.  The 
total  annuity  paid  the  bank  by  the  government  was  fixed  at 
,£115,384,  which  was  reduced  in  1845  to  ,£92,076,  or  at  the 
rate  of  three  and  a  half  per  cent,  on  the  English  equivalent 
of  the  amount  of  the  loan,  and  was  further  slightly  reduced 
in  1892. 

The  suspension  of  cash  payments  in  England  in  1797  was 
extended  to  Ireland,  without  any  apparent  necessity,  "  for 
the  sake  of  uniformity."  Exchange  was  then  in  favor  of 
Ireland,  there  was  no  special  demand  upon  the  Bank  of 
Ireland  and  no  drain  of  gold  was  feared.  The  effect  of  sus- 
pension, however,  was  to  enormously  stimulate  the  issue  of 
notes,  which  increased  from  ,£621,917  in  1797  to  ,£2,482,162 
in  1800,  ,£3,068,100  in  1809,  ,£4,212,600  in  1813,  and  finally 
reached  ,£5,182,600  in  1821  and  ,£6,309,300  in  1825.  Ex- 
change turned  against  Ireland  as  early  as  1804  and  led  to 
the  special  inquiry  by  the  British  Parliament  which  resulted 
in  the  formulation  of  the  principles  afterwards  repeated  with 


BANKING  IN  IRELAND.  173 

greater  elaboration  in  the  Bullion  Report.  The  evidence 
showed  that  silver  had  disappeared  from  circulation,  even 
for  subsidiary  purposes,  and  been  replaced  by  silver  notes. 
Mr.  Colville,  a  director  of  the  Bank  of  Ireland,  testified  that 
there  were  in  Ireland  seven  bankers  issuing  notes  ;  28  issuers 
of  gold  and  silver  notes,  62  issuers  of  silver  notes  ;  and  128 
issuers  of  I.  O.  U's.  1  The  Bank  of  Ireland  made  large 
profits  upon  its  forced  circulation,  and  paid  dividends  never 
less  than  six  and  a  half  per  cent,  and  rising  in  1803  and 
1805,  including  a  bonus,  to  twelve  and  a  half  per  cent.  Ex- 
change on  lyondon  became  favorable  after  a  time,  not  because 
the  value  of  Irish  currency  was  raised,  but  because  that  of 
Bngland  had  fallen  to  its  level. 

The  substantial  monopoly  of  joint  stock  banking  by  means 
of  note  issues  was  conferred  upon  the  Bank  of  Ireland  by 
the  act  of  incorporation,  which  declared  that  it  should  "  not 
be  lawful  for  any  body  politic  or  corporate,  erected  or  to  be 
erected,  other  than  the  corporation  thereby  intended  to  be 
created  and  erected  into  a  national  bank,  or  for  any  other 
persons  whatsoever  united  or  to  be  united  in  covenant  or 
partnership  exceeding  the  number  of  six  persons,  to  borrow, 
owe,  or  take  up  any  sum  or  sums  of  money  on  their  bills  or 
notes  payable  at  demand,  or  at  any  less  time  than  six  months 
from  the  borrowing  thereof. ' '  This  provision  left  it  in  the 
power  of  individuals  and  firms  of  small  numbers  to  issue 
notes,  and  this  privilege  was  availed  of  to  a  great  extent 
after  the  suspension  of  cash  payments.  Nothwithstanding 
the  worthless  character  of  many  of  these  institutions,  the 
demand  for  currency  was  so  imperative  that  large  quantities 
of  notes  were  easily  floated  and  great  distress  occurred,  after 
1820,  when  the  number  of  institutions  outside  the  Bank  of 
Ireland  had  been  reduced  to  six.  The  Bank  of  Ireland  was 
permitted  by  an  Act  of  1821  (chapter  27)  to  resume  cash 
payments  on  June  ist  of  that  year. 

The  absence  of  a  proper  circulating  medium,  in  spite  of 
the  monopoly  enjoyed  by  the  Bank  of  Ireland,  led  to  a  pro- 


MacLeod,  Theory  of  Credit,  II.,  609. 


174          HISTORY  OF  MODERN  BANKS   OF  ISSUE. 

vision  in  the  act  which  increased  the  capital  of  the  bank,  * 
that  the  bank  should  surrender  its  monopoly  outside  the 
circuit  of  fifty  Irish  miles  from  Dublin.  Companies  of  more 
than  six  partners  were  henceforth  authorized  to  do  a  bank- 
ing business  and  to  issue  circulating  notes  outside  the  pro- 
posed limit.  A  party  of  Knglish  capitalists  determined  to 
take  advantage  of  this  provision  and  at  a  meeting  in  London 
on  June  n,  1824,  resolved  to  found  a  bank  with  a  capital 
of  ,£2,000,000  in  shares  of  ,£100  each,  of  which  one-fourth 
was  to  be  paid  up.  Subscriptions  we.re  received  far  beyond 
the  amount  needed  before  the  end  of  the  year  and  the  capital 
of  the  Provincial  Bank  of  Ireland,  which  was  thus  estab- 
lished, has  never  been  increased  except  in  1836,  when  .£40,- 
ooo  was  transferred  to  the  capital  from  the  ' '  rest ' '  or  reserve 
fund.  The  monopoly  enjoyed  by  the  Bank  of  Ireland  in 
Dublin  made  it  necessary  to  keep  the  head  office  of  the  new 
bank  in  London,  but  an  agency  was  established  in  Dublin 
and  Messrs.  La  Touche  and  Company  acted  as  agents  until 
1838,  when  the  bank  opened  its  own  office. 

The  Provincial  Bank  rapidly  extended  its  branches 
throughout  Ireland,  establishing  them  at  Cork,  Limerick, 
Clonmel,  and  Londonderry  in  1825  ;  at  Sligo,  Wexford,  Bel- 
fast, Waterford,  and  Gal  way  in  1826,  and  at  other  towns  in 
successive  years.  The  Bank  of  Ireland,  which  had  been 
content  with  its  head  office  until  it  found  competitors  in  the 
field,  began  a  policy  of  opening  branches  and  established 
them  at  Cork,  Waterford,  Clonmel,  Londonderry,  Newry, 
Belfast,  and  Westport  almost  as  soon  as  the  prospectus  of  the 
Provincial  Bank  had  appeared.  They  began  an  action  of 
law  against  the  Provincial  Bank  in  December,  1828,  because 
of  the  payment  of  the  latter' s  notes  in  Dublin.  The  jury 
found  in  favor  of  the  Bank  of  Ireland  upon  the  law  and  the 
evidence,  but  awarded  damages  at  sixpence,  with  costs  of  a 
like  amount,  as  evidence  of  the  feeling  in  the  business  com- 
munity of  Dublin  against  the  narrow  policy  of  the  bank. 
The  restiveness  of  the  merchants  was  further  indicated  in  a 
petition  to  the  Lords  of  the  Treasury  for  the  establishment 

'2  George  IV.,  c.  72. 


BANKING  IN  IRELAND.  175 

of  joint  stock  banks  in  Dublin,  which  led  to  a  compromise. 
An  Act  was  passed  in  1830,  making  lawful  the  payment  of 
notes  in  Dublin  by  the  issuing  bank  for  the  purpose  of  with- 
drawing them  from  circulation.  The  Provincial  Bank  ob- 
tained the  privilege  in  1827  of  receiving  the  revenues  of  the 
excise,  stamps,  and  postal  service  outside  the  Dublin  district 
reserved  to  the  Bank  of  Ireland.  Collectors  of  revenue  were 
authorized  in  the  same  year  to  receive  the  notes  of  the  bank 
in  the  same  manner  as  those  of  the  Bank  of  Ireland. 

The  Acts  of  1820  and  1825  made  it  possible  to  establish 
joint  stock  banks  in  different  parts  of  Ireland  and  several  of 
these  were  soon  incorporated.  The  first  was  the  Northern 
Banking  Company,  founded  by  the  partners  of  a  private  bank 
of  the  same  name  in  Belfast.  An  attempt  was  made  to  convert 
this  bank  into  a  joint  stock  bank  in  1820,  but  it  was  found 
necessary  to  await  a  change  of  the  law  requiring  the  residence 
of  all  the  partners  in  Ireland.  The  bank  began  business  in  its 
new  character  in  January,  1825,  with  a  capital  of  ,£500,000. 
The  capital  was  increased  in  1867  to  ,£1,000,000  and  has 
since  been  increased  to  £2,000,000,  of  which  ,£400,000  has 
been  paid  in.  The  Northern  Banking  Company  purchased 
the  business  of  Messrs.  Ball  and  Co.,  of  Dublin  in  1888  at  a 
cost  of  ,£22,500  and  opened  an  office  at  the  capital.  The 
Belfast  Banking  Company  was  another  institution  which 
was  founded  upon  a  private  company.  It  began  business  as 
a  joint  stock  bank  of  issue  on  August  i,  1827,  with  a  capital 
of  ,£500,000,  of  which  ,£125,000  was  paid  in.  The  capital 
was  increased  in  1866  to  £"1,000,000  and  in  1883  to  ,£2,000,- 
ooo  with  ,£400,000  paid  in. 

The  National  Bank  of  Ireland  was  founded  in  1835  as  the 
result  of  the  Nationalist  feeling  in  the  country.  It  began 
business  at  the  Carrick-on-Suir  with  a  subscribed  capital  of 
,£1,000,000  and  consisted  at  first  of  separate  bodies  of  share- 
holders, English  and  Irish.  When  a  branch  was  opened, 
the  local  share-holders  subscribed  a  portion  of  the  capital 
and  the  English  proprietors  contributed  a  like  amount. 
The  profits  were  divided  evenly  between  the  two  interests, 
but  the  system  proved  inconvenient  and  the  stocks  were 


i;  HISTORY   OF  MODERN  BANKS  OF  ISSUE. 

consolidated  in  1837  except  in  two  branches,  where  the 
consolidation  was  delayed  until  1856.  Daniel  O'Connell 
was  the  first  governor  of  the  bank  and  his  name  caused 
the  institution  to  be  dubbed  "The  Liberator's  Bank" 
and  made  way  for  its  notes  all  over  Ireland.  The  only 
other  bank  of  issue  which  is  still  doing  business  is  the 
Ulster  Bank,  founded  in  1836,  at  Belfast.  The  capital  was 
originally  ,£1,000,000,  which  has  since  been  increased  to 
,£2,400,000,  with  ,£400,000  paid  up.  The  profits  paid  in 
dividends  to  the  shareholders  were  twenty  per  cent,  annu- 
ally from  1866  to  1885  and  have  been  only  a  little  less  in 
subsequent  years.  The  Royal  Bank  of  Ireland  was  estab- 
lished at  Dublin  in  1836,  but  was  restrained  by  the  monopoly 
of  the  Bank  of  Ireland  from  issuing  notes,  and  was  found  in 
this  condition  in  1845  by  the  legislation  confirming  the 
power  of  issue  to  the  banks  which  then  possessed  it.  The 
Royal  Bank,  although  a  powerful  and  profitable  institution, 
was,  therefore,  never  enrolled  among  Irish  banks  of  issue. 

The  foundation  of  the  National  Bank  was  intended  to 
offset  in  a  measure  the  collapse  of  the  Agricultural  and 
Commercial  Bank  of  Ireland,  which  was  established  in  1834 
by  the  appeals  of  a  Dublin  baker,  Mr.  Thomas  Mooney,  to 
the  patriotism  of  the  Irish  people.  Mr.  Mooney  bore  the 
same  name  as  a  Dublin  capitalist  of  wealth  and  standing  and 
he  secured  as  one  of  the  directors  a  stationer  named  James 
Chambers,  which  was  also  the  name  of  a  distinguished 
Dublin  financier  who  was  a  director  of  the  Bank  of  Ireland. 
The  impression  generally  prevailed  that  these  two  eminent 
gentlemen  were  interested  in  the  new  bank  and  Mr.  T.  M. 
Gresham,  who  was  brought  into  the  bank  just  before  its 
collapse,  testified  before  a  committee  of  the  House  of  Com- 
mons that  "  there  is  no  manner  of  doubt  that  we  were  all 
deceived  in  two  names  in  that  bank."  The  capital  of  the 
Agricultural  Bank  was  gathered  up  from  all  sorts  of  humble 
people  by  appeals  to  their  Irish  patriotism  and  parts  of  it 
were  obtained  by  liberal  discounts  to  those  who  presented 
commercial  bills.  A  meeting  of  the  shareholders  after  the 
collapse  of  the  bank  was  attended  by  two  steamboat-loads 


BANKING  IN  IRELAND.  1 77 

from  Belfast,  most  of  whom  had  their  expenses  paid  by  the 
directors,  and  another  contingent  came  from  the  south  of 
Ireland  in  canal  boats.  The  branch  managers  of  the  bank 
were  selected  according  to  their  holdings  of  stock  and  acted 
in  reckless  disregard  of  orders  from  the  head  office,  even  to 
the  extent  of  raising  their  own  salaries  and  dating  the 
increase  back  to  the  time  of  their  appointment.1  The  nom- 
inal capital  of  the  Agricultural  Bank  was  ^1,000,000,  but  it 
was  admitted  that  at  the  time  of  beginning  business  it  did 
not  actually  exceed  .£3,000.  The  first  branch  was  opened 
at  Nenagh,  Tipperary  County,  in  November,  1834,  and  the 
bank  was  compelled  to  close  its  doors  on  November  14,  1836. 
A  special  act  of  Parliament  was  required  to  wind  up  the 
affairs  of  the  bank  and  an  attempt  to  put  it  on  its  feet  under 
a  new  organization  failed  in  1841. 

The  Tipperary  joint  stock  bank,  which  succeeded  Scully's 
private  bank  in  1838,  did  not  issue  its  own  notes,  but  had  an 
arrangement  with  the  Bank  of  Ireland  by  which  its  paper 
was  discounted.  The  power  was  reserved  to  the  Tipperary 
bank  by  the  Act  of  1845  to  take  the  same  amount  of  issue 
as  it  would  have  been  entitled  to  in  case  of  the  termination 
of  the  agreement  with  the  Bank  of  Ireland,  so  that  it  was 
recognized  as  connected  with  the  system  of  banks  of  issue. 
The  directors  of  the  institution  when  it  became  a  joint  stock 
bank  were  John  Sadlier,  his  brother  James,  and  Mr.  James 
Scully.  The  capital  of  the  bank  was  ,£100,000,  a  portion 
of  which  was  held  in  England,  and  favorable  reports  were 
regularly  made  and  large  dividends  declared  for  some  seven- 
teen years.  Prosperity  seemed  to  reign  in  the  affairs  of  the 
bank  until  February,  1856,  when  the  doors  were  closed,  less 
than  a  month  after  the  issue  of  a  favorable  report  and  the 
declaration  of  a  dividend.  It  was  found  that  John  Sadlier 
had  systematically  robbed  the  bank  and  falsified  the  accounts. 
Sadlier  was  one  of  the  brilliant  swindlers  who  so  often  take 
the  world  by  storm  and  persuade  shrewd  men  of  business  to 
embark  with  them  in  great  enterprises.  He  had  piloted 
through  Parliament  several  important  railway  bills,  obtained 

1  Dillon,  71-77. 


178          HISTORY  OF  MODERN  BANKS   OF  ISSUE. 

the  reputation  of  immense  wealth,  been  elected  member  of 
Parliament  for  Carlow,  and  was  offered  and  accepted  the 
position  of  a  Junior  Lord  of  the  Treasury.  He  became 
chairman  of  the  London  and  County  Bank  in  1848,  chair- 
man of  the  Royal  Swedish  Railway  and  a  director  in  num- 
erous stock  companies.  Towards  the  close  of  his  career  he 
indiscriminately  used  all  the  funds  of  either  corporation  he 
could  lay  his  hands  on,  issued  duplicate  shares  in  the  rail- 
way company  and  forged  documents  which  he  deposited  as 
security  for  advances  from  other  bankers.  His  forgeries 
began  to  be  suspected,  the  Tipperary  Bank  collapsed,  and  on 
February  17,  1856,  Sadlier's  body  was  found  by  a  laborer 
crossing  Hampstead  Heath,  lying  on  the  ground  with  a 
bottle  labelled  "  poison  "  beside  it.1 

The  Banking  Act  of  1845,  following  the  similar  legisla- 
tion for  England  and  Scotland,  repealed  the  acts  of  Parlia- 
ment which  prohibited  the  formation  of  stock  companies  for 
banking  with  more  than  six  partners.  This  threw  down  the 
bars  to  all  comers,  so  far  as  the  organization  of  banks  of 
discount  and  deposit  was  concerned,  but  circulation  was  put 
in  a  straight  jacket,  as  in  the  case  of  the  English  banks. 
The  authorized  issue  of  circulating  notes  after  December  6, 
1845,  was  not  to  be  permitted  to  exceed,  upon  an  average 
of  four  weeks,  the  average  amount  of  the  circulation  for  the 
year  ending  on  the  first  day  of  May,  i845.2  If  any  two 
banks  united,  they  were  allowed  to  maintain  the  aggregate 
authorized  circulation  of  both  the  old  banks,  and  if  any  bank 
surrendered  its  issue  or  agreed  to  issue  Bank  of  Ireland  notes, 
the  Bank  of  Ireland  was  allowed  to  increase  its  issues  to  the 
full  amount  of  the  notes  withdrawn.  The  law  differed  in 
this  respect  from  the  English  act,  which  limited  the  increase 
in  Bank  of  England  issues  in  such  cases  to  two- thirds  of  the 
issues  withdrawn. 

The  Irish  law  differed  in  an  important  respect  from  the 
English  banking  act  in  regard  to  the  additional  circulation 
which  the  banks  were  authorized  to  issue  against  deposits 

1  Dillon,  81-86. 

3  8  and  9  Victoria,  c.  37,  sec.  19. 


BANKING  IN  IRELAND.  179 

of  coin  and  bullion.  This  privilege  was  accorded  to  all  the 
Irish  banks  of  issue, — instead  of  but  one,  as  in  the  case  of 
England, — and  they  were  thus  put  upon  an  equal  footing 
with  no  apparent  purpose  of  concentrating  issues  finally  in  a 
single  institution.  The  Irish  banks  are  required,  however, 
to  keep  the  coin  held  against  additional  circulation  wholly 
at  their  head  offices,  while  all  their  notes  are  required  to  be 
redeemed  on  demand  at  the  place  or  places  where  issued. 
These  requirements  compel  them  to  keep  a  supply  of  coin  at 
every  branch,  in  order  to  redeem  notes  issued  from  that 
branch,  and  it  is  the  practice  for  a  bank  to  redeem  any  of  its 
notes  at  any  of  its  branches  where  they  may  be  presented. 
The  fact  that  the  privilege  of  additional  issues  has  been 
availed  of  to  only  a  limited  extent,  while  the  coin  holdings 
of  the  banks  have  been  large,  would  seem  to  indicate  that 
the  fixed  limit  of  authorized  issues  has  not  operated  greatly 
to  restrain  the  business  development  of  Ireland.  One  reason 
for  this  is  doubtless  found  in  the  fact  that  the  population  and 
the  volume  of  business  were  so  greatly  decreased  in  the 
famine  years,  while  the  authorized  circulation  remained 
untouched.  The  limit  has  proved  in  practice  so  generous 
that  Ireland  has  enjoyed  a  currency  fluctuating  with  the 
seasons  and  with  the  varying  demand  for  money,  in  much 
the  same  manner  as  an  untrammelled  banking  currency. 

The  circulation  was  nearly  ,£1,000,000  above  the  limit  in 
1846,  standing  at  ,£7, 266,000,  but  declined  as  low  as  ,£4,310- 
ooo  in  1849.  The  average  returned  in  1854  to  ;£6, 296,000 
and  increased  pretty  steadily  until  1860,  when  it  stood  at 
,£6,840,000.  A  decline  then  set  in,  which  reached  its  lowest 
ebb  in  1863  at  ,£5,405,000.  Another  period  of  increase 
carried  the  average  circulation  for  1872  as  high  as  ,£7, 674,000, 
after  which  it  fell  to  ,£6, 065,000  in  1879,  rose  to  ,£7, 297,000 
in  1882  and  fell  to  ,£5, 885,000  in  1887, — the  lowest  average 
for  twenty  years.  The  authorized  circulation  of  each  bank, 
with  the  circulation  and  specie  holdings  for  the  four  weeks 
ending  November  30,  1895,  are  shown  in  the  following 
table : 


i8o 


HISTORY  OF  MODERN  BANKS  OF  ISSUE. 


BANK. 

AUTHORIZED 
CIRCULATION. 

AVERAGE   CIRCU- 
LATION  FOR 
FOUR  WEEKS. 

AVERAGE  GOLD 
AND  SILVER 
HELD  FOR   FOUR 
WEEKS. 

Bank  of  Ireland     .  .       ... 

/T    7^8    428 

7~2  670  47^ 

/~648    823 

Provincial  Bank  of  Ireland.  . 
Belfast  Bank  

927,667 
28l,6ll 

801,786 

610,087 

353,299 

470  ^S1} 

Northern  Bank.  .           .... 

24  ^  4.4O 

eqi  026 

46  1  2  I  O 

Ulster  Bank  

^11  O7Q 

807  Q74 

708  ^n 

The  National  Bank  

852  269 

1,7^6,717 

8^4  ^4Q 

Total  

6  ^4  4Q4 

6,028  06^ 

34Q7  Oo8 

The  average  circulation  shown  consisted  of  ^2,896, 841  in 
notes  of  denominations  under  ^5  and  ,£4,032,124  in  notes 
for  ^5  and  more. 

The  elastic  character  of  the  Irish  currency,  in  spite  of  the 
restrictions  of  law,  gives  an  interest  to  the  fluctuations  dur- 
ing the  year  which  result  from  the  varying  demand  for 
money.  Beginning  with  January,  the  amount  of  the  circula- 
tion usually  declines, — slowly  at  first,  but  more  rapidly  in 
May,  June,  and  July,  until  it  reaches  its  lowest  point  at  the 
end  of  August.  Then  begins  the  process  described  by  Mr. 
Gilbart,  as  a  consequence  of  the  law  that  ' '  the  monthly  cir- 
culation must  depend  upon  the  quantity  of  produce  brought 
to  market  within  the  month  ' '  : 

Now,  it  lias  been  the  custom  in  Ireland  to  commence  bringing  the 
produce  to  market  immediately  after  the  harvest.  Hence  arises  the 
increase  of  the  notes  in  September,  and  their  further  increase  in  the  fol- 
lowing month.  But  in  the  beginning  of  the  year  the  landlords  collect 
their  rents,  and  receive  from  their  tenants  the  notes  for  which  this 
produce  has  been  sold  ;  this  brings  the  notes  back  to  the  bank,  either 
to  be  placed  to  his  credit  (if  he  have  an  account  there),  or,  otherwise, 
in  exchange  for  a  letter  of  credit  on  Dublin,  or  a  bill  on  London. 
The  circuit  of  a  note,  then,  is  this  : — It  is  obtained  from  the  bank  by 
a  corn -merchant,  who  pays  it  to  a  farmer  for  his  corn,  which  he  ships 
to  England.  The  farmer  afterwards  pays  the  note  for  rent  to  his 
landlord,  who  brings  it  back  to  the  bank.  1 

One  of  the  peculiar  features  of  the  Irish  circulation,  like 
the  Scottish,  is  the  large  proportion  of  small  notes.  The 
Select  Committee  of  the  House  of  Commons  in  1826  recom- 
mended fixing  a  limit  of  time  in  the  future  beyond  which 

1  The  History,  Principles,  and  Practice  of  Banking,  II.,  286. 


BANKING  IN  IRELAND. 


181 


the  circulation  of  notes  below  ^5  should  cease,  but  the  testi- 
mony given  before  the  committee  was  against  such  a  restric- 
tion and  it  was  not  adopted.  The  arguments  made  against 
the  restriction  were  that  it  would  check  the  growth  of 
manufactures,  make  difficult  the  sale  of  small  lots  of  agri- 
cultural produce,  and  curtail  the  accommodation  which  the 
banks  are  able  to  give  their  customers  and  especially  their 
cash  credits.  The  transfer  of  gold,  it  was  pointed  out,  would 
be  inconvenient  and  costly,  and  once  sent  out  of  the  country 
it  would  rarely  come  back.  The  Act  of  1845  prohibited  notes 
of  fractions  of  £i  and  required  the  banks  in  their  reports  to 
state  separately  the  notes  in  circulation  under  ^5.  These 
returns  have  shown  a  large  proportion  of  small  notes  in  cir- 
culation and  a  marked  increase  from  September  to  January 
over  the  spring  and  summer  months.  This  circulation  of 
small  notes  has  contributed,  with  the  widely  diffused  system 
of  branches,1  and  the  existence  of  several  strong  joint  stock 
banks  without  the  power  of  issue,  to  afford  reasonably  ade- 
quate facilities  for  the  development  of  banking  in  Ireland. 
The  proof  of  the  growing  use  of  banking  facilities  is  afforded 
by  the  steady  expansion  of  deposits,  shown  in  the  following 
table,  in  the  face  of  a  decreasing  population  : 


YEAR. 

POPULATION. 

TOTAL  DEPOSITS  AND 
CASH  BALANCES. 

DEPOSITS  PER 
CAPITA. 

£     J.      d. 

1840 

8,155,521 

£5,567,851 

o  13     8 

1847 

8,025,274 

6,493,124 

0     l6        2 

1850 

6,877,549 

8,268,838 

i     4     i 

1855 

6,014,665 

12,285,822 

2      0   10 

1860 

5,82O,96O 

15,609,237 

2  13     7 

1865 

5,594,589 

18,619,000 

3     6     7 

1870 

5,418,512 

24,366,OOO 

4    9  ii 

1875 

5,278,629 

33,519,000 

670 

1880 

5,202,648 

29,746,000 

5  14    4 

1885 

4,924,342 

29,370,000 

5  19    4 

1890 

4,716,996 

33,061,000 

702 

1893 

4,606,527 

34,637,000 

7  10    4 

1  The  number  of  branches  of  the  issuing  banks  in  1887  was  353, 
affording  an  average  of  one  to  13,000  inhabitants  and  to  200  square 
kilometers.  Counting  the  joint  stock  banks  which  do  not  issue  notes, 
the  average  was  one  branch  to  10,500  inhabitants  and  to  180  kilo- 
meters.—Noel,  I.  75.  The  number  of  offices  of  all  Irish  banks  at  the 
beginning  of  1895  was  571. 


CHAPTER  VIII. 

THK   BANKS   OF   GERMANY. 

The  Bank  of  Prussia  and  the  Share  of  the  State  in  its  Profits — Other 
Banks  of  Issue  in  Prussia  and  the  Smaller  States  of  Germany— 
The  Reform  of  Currency  and  Banking  under  the  Empire — The 
Sales  of  Silver  and  the  Withdrawal  of  Paper  Money — Absence  of 
Legal  Tender  Character  in  the  Bank-Notes. 

THE  existing  banking  system  of  the  German  Empire  is 
a  part  of  the  fabric  of  imperialism  which  was  so  in- 
dustriously built  up  by  Prince  Bismarck  from  the  be- 
ginning of  his  premiership  in  1862  until  his  retirement  from 
office.  The  Imperial  Bank  of  German)7  is  in  a  measure  an 
expansion  and  development  of  the  Bank  of  Prussia,  which 
was  founded  in  the  time  of  Frederick  the  Great,  but  it  has 
already  absorbed  the  circulation  belonging  to  the  banks  of 
most  of  the  other  German  states  and  is  authorized  to  absorb 
the  entire  paper  circulation  of  the  Empire  as  it  is  surrendered 
by  the  local  banks,  in  much  the  same  manner  as  the  Bank 
of  England  is  authorized  by  the  Act  of  1844  to  absorb  the 
circulation  of  the  country  banks  of  England  and  Wales. 
The  circulation  of  the  Imperial  German  Bank,  while  mod- 
elled in  many  respects  on  that  of  the  Bank  of  England,  is 
capable  of  a  somewhat  greater  degree  of  elasticity,  by  virtue 
of  a  legal  provision  for  an  emergency  circulation  above  the 
usual  limit,  and  the  notes  are  not  a  legal  tender. 

The  Bank  of  Prussia  was  created  by  virtue  of  an  edict  of 
June  17,  1765,  under  the  name  of  the  Royal  Bank  of  I^oans 
and  Current  Accounts  at  Berlin  (Konigliche  Giro-  und  Lehn- 
bank  zu  Berlin}  with  a  capital  of  1,000,000  thalers  ($750,000) 

182 


THE  BANKS   OF  GERMANY.  183 

and  was  at  first  exclusively  an  institution  of  state.  It  con- 
tinued to  be  a  state  institution  until  1846,  when  the  new  de- 
mands for  capital  for  railways  and  for  the  extension  of 
commercial  relations  led  to  an  extension  of  the  scope  of  the 
bank  and  an  appeal  to  private  capital  to  carry  it  on.  Two 
ordinances  of  April  14  and  July  18,  1846,  authorized  the 
increase  of  the  capital  by  a  sum  of  10,000,000  thalers  ($7,500,- 
ooo)  and  admitted  the  shareholders  to  a  part  in  the  adminis- 
tration by  means  of  a  central  commission  composed  of  fifteen 
members,  who  were  authorized  to  appoint  a  commitee  of  three 
to  exercise  a  regular  supervision  over  the  acts  of  the  direc- 
tors. *  The  capital  owned  by  the  State  had  been  increased  by 
the  setting  aside  of  profits  until  it  had  reached  in  1846  1,197,- 
553  thalers  ($900,000),  and  the  portion  furnished  by  the  pub- 
lic was  increased  in  May,  1856,  to  15,000,000  thalers  and 
again  by  the  law  of  September  24,  1866,  to  20,000,000  thalers, 
($15,000,000),  divided  into  shares  of  a  par  value  of  one 
thousand  thalers  each.  The  capital  credited  to  the  state  had 
been  increasing  in  the  meantime  until  it  attained  in  Decem- 
ber, 1867,  a  total  of  1,897,800  thalers  ($1,425,000). 

The  government  took  care  to  keep  its  hands  firmly  on  the 
direction  of  the  bank,  in  spite  of  the  new  privileges  given 
the  shareholders,  and  limited  the  right  to  participate  in  the 
general  assembly  of  shareholders  to  the  two  hundred  hold- 
ing the  largest  amount  of  stock  domiciled  in  Prussia.  Su- 
preme control  was  reserved  directly  and  exclusively  to  a 
privy  council  (Bank  Kuratorium),  composed  of  the  Presi- 
dent of  the  Council  of  Ministers,  the  Ministers  of  Finance, 
of  Justice,  and  of  Commerce,  and  a  fifth  member  named  by 
the  King.  The  direct  management  also  was  confided  to  a 
director  and  a  committee  of  direction  appointed  upon  the 
King's  nomination.  This  official  control  was  compensated 
in  a  measure  by  exemptions  from  imposts  and  from  certain 
taxes  which  were  imposed  upon  other  similar  establishments. 
The  bank  was  compelled,  however,  to  pay  interest  on  the 
deposit  of  the  public  funds  and  to  pay  three  and  a  half  per 


Noel,  I.,  246. 


1 84          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

cent,  upon  the  capital  contributed  by  the  State  and  half  the 
net  profits  remaining  after  the  payment  of  a  dividend  of  a 
like  amount  to  the  shareholders.  The  receipts  of  the  gov- 
ernment from  these  sources,  including  interest  on  its  own 
stock,  attained  a  very  considerable  figure  during  the  eight 
years  prior  to  its  transformation  into  the  new  Imperial  Bank, 
amounting  to  3,166,436  thalers  in  1873  ;  1,711,920  thalers  in 
1874  ;  and  2,284,875  thalers  in  1875. 

The  accounts  of  the  Bank  of  Prussia  afford  a  good  illus- 
tration of  the  principle  that  banks  of  issue  usually  precede 
mere  banks  of  discount  and  deposit  as  a  means  of  familiar- 
izing the  public  with  banking  methods.  There  were  scarcely 
any  deposits  in  the  early  history  of  the  bank,  except  those 
made  by  the  government  and  upon  which  interest  was  paid 
by  the  bank.  These  government  deposits  came  from  the 
trust  funds  of  the  courts,  including  those  of  guardianship, 
and  the  administration  of  churches,  schools,  hospitals,  and 
other  charitable  foundations  and  public  institutions.  Their 
magnitude  constantly  grew  and  their  use  by  the  bank  gave 
it  loanable  funds  which  it  could  not  otherwise  have  obtained 
except  by  an  issue  of  notes  upon  commercial  paper  dispro- 
portionate to  its  original  capital.  This  money  entrusted  to 
the  bank  enabled  it  to  do  a  discount  business  which  steadily 
grew  with  the  expansion  of  commerce  in  Prussia  and  among 
her  neighbors.  The  aggregate  of  the  discount  business  of 
the  year  rose  from  1,581,956,399  marks  ($395,000,000)  in 
1867  to  2,630,469,468  marks  in  1871,  3,958,299,756  marks  in 
1872,  and  5,350,216,312  marks  in  1873.  The  business  depres- 
sion which  began  in  the  latter  year  forced  the  discounts  down 
to  4,136,089,162  marks  in  1874  and  to  4,099,613,175  marks 
($1,025,000,000)  in  1875. 

One  of  the  peculiarities  of  the  Bank  of  Prussia,  which  ex- 
tended to  many  other  German  banks,  was  the  practice  of 
making  loans  upon  merchandise  as  well  as  upon  bullion 
and  the  pledge  of  securities.  Business  of  this  kind  was  al- 
ways kept  within  conservative  limits  and  the  statutes  of  the 
Bank  of  Prussia  admitted  the  precious  metals  at  a  valuation 
of  only  95  per  cent,  of  their  real  value  and  merchandise  at 


THE  BANKS  OF  GERMANY.  185 

from  50  to  60  per  cent.  The  valuation  of  negotiable  securi- 
ties was  determined  by  the  officers  of  the  bank.  All  these 
operations  were  limited  in  amount  and  were  required  to  run 
for  terms  no  longer  than  bills  of  exchange,  for  which  the 
maximum  was  three  months.  The  number  of  loans  of  this 
sort  steadily  declined  during  the  latter  years  of  the  history 
of  the  bank,  while  the  amount  increased,  reaching  a  maxi- 
mum in  1872  of  824,840,690  marks  ($206,000,000),  including 
securities. 

The  issue  of  circulating  notes  was  the  chief  means  by 
which  the  Bank  of  Prussia  was  able  to  utilize  its  assets  and 
there  was  no  limit  of  law  after  1856  upon  the  volume  of  the 
issues.  The  law  of  1846  forbade  the  issue  of  bills  for  a 
greater  sum  than  21,000,000  thalers  ($15,750,000),  but  the 
repeal  of  this  provision  in  1856  left  the  bank  untrammelled, 
except  as  the  opinion  of  the  banking  community  imposed  a 
relation  of  one  to  three  between  the  metallic  reserve  and  the 
circulation.  The  bills  were  not  a  legal  tender  and  were  re- 
deemable in  coin  on  demand,  but  they  were  accepted  in  pub- 
lic depositories  by  virtue  of  a  royal  ordinance  of  June  9, 
1847.  The  denominations  were  limited  to  ten,  twenty-five, 
fifty,  one  hundred,  and  five  hundred  thalers,  equivalent  to  a 
minimum  of  $7.50  and  a  maximum  of  $375.  A  further 
limitation  was  imposed  that  bills  of  the  smallest  denomina- 
tion should  not  exceed  a  total  of  10,000,000  thalers  ($7,500,- 
ooo),  and  in  fact  their  number  never  surpassed  957,000  in 
the  ten  years  preceding  consolidation  with  the  Bank  of  the 
Empire  and  had  descended  in  1875  to  520,000  ($3,900,000). 
The  maximum  note  circulation  in  1860  was  93,029,000  tha- 
lers ($70,000,000)  ;  in  1865,  136,148,000  thalers,  and  1870 
202,488,000  thalers.  The  increase  was  more  rapid  in  the 
next  few  years  and  carried  the  maximum  in  1871  to  242,242,- 
ooo  thalers  ;  in  1872,  to  311,531,000  thalers  ;  in  1873  to  342,- 
290,000  thalers  ;  and  in  1874  to  297,412,000  thalers. 

The  reserve  of  the  Bank  of  Prussia  consisted  of  gold  and 
silver  coin  and  bullion,  public  securities,  bills  of  Prussian 
private  banks,  and  securities  payable  at  sight  or  otherwise 
and  until  1869  of  accepted  drafts  (Giro-Anweisungen).  The 


1 86          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

total  of  this  reserve  reached  in  1875  about  1,900,000,000 
marks  ($475,000,000).  The  proportion  of  coin  and  bullion 
seldom  exceeded  one-third  of  this  aggregate.  The  maximum 
in  1860  was  77,457,000  thalers  ($58,000,000)  and  had  only 
reached  99,427,000  thalers  in  1870.  The  rapid  increase  of 
the  number  of  branches  of  the  bank  scattered  over  Prussia 
and  the  growth  of  commercial  operations  led  to  an  increase 
in  the  reserve  during  the  last  four  years  of  the  operations  of 
the  bank  commensurate  with  the  increase  in  its  circulation 
and  discounts,  so  that  the  maximum  in  1874  was  239,860,- 
ooo  thalers  ($180,000,000)  and  the  minimum  was  203,511,000 
thalers  ($152,000,000).  The  Bank  of  Prussia,  in  spite  of 
the  share  which  the  government  enjoyed  in  its  profits,  had 
no  monopoly  of  the  right  of  note  issue  in  the  Kingdom.  By 
its  side  and  in  competition  with  its  numerous  branches  ex- 
isted eight  local  banks,  including  one  at  Berlin,  whose  united 
capital  was  8,899,000  thalers  ($6,675,000)  and  which  had  the 
right  to  issue  bills  to  the  amount  of  7,000,000  thalers,  but  in 
no  case  of  a  smaller  denomination  than  ten  thalers  ($7.50).' 
The  branches  of  the  Bank  of  Prussia  increased  from  143  in 
1867  to  158  in  1870  and  167  in  1875. 2 

The  other  German  states  were  not  without  flourishing 
banks  of  issue,  which  conformed  in  the  general  features  of 
their  organization  to  the  Bank  of  Prussia.  There  were 
thirty-three  German  banks  in  existence,  including  those  of 
Prussia,  when  the  Imperial  Bank  was  established  in  1875. 
Two  of  these  were  commercial  banks  and  one  was  a  terri- 
torial bank,  the  capital  in  each  of  these  cases  being  furnished 
by  the  municipality  or  the  State  and  the  liabilities  constituting 
a  general  claim  against  the  government  and  the  community. 
The  others  were  organized  as  stock  companies.  Three  of 
the  German  banks — the  Bank  of  Bremen,  founded  in  1856  ; 
the  Bank  of  Thuringia,  founded  in  1856  ;  and  the  Bank  of 
Anhalt-Dessau,  founded  in  1847 — ne^  charters  without 
limit  of  time,  which  were  regarded  as  perpetual.  The  char- 


1  Courcelle-Seneuil,  365. 
8  Noel,  L,  250. 


THE  BANKS  OF  GERMANY.  l8/ 

t.ers  of  the  other  banks  ran  for  various  periods  from  one  year 
to  eighty-one  years.  The  charters  of  the  Bank  of  Gera, 
which  expired  in  1953,  and  of  the  Banks  of  Central  Germany 
and  Lower  Saxony,  which  expired  in  1956,  had  been  granted 
originally  for  one  hundred  years. 

The  oldest  of  the  banks  with  limited  charters  was  that  of 
Pomerania,  established  at  Stettin  in  1821,  with  a  capital  of 
6,000,000  marks.  The  others  were  :  The  Bavarian  Bank  of 
Mortgage  and  Exchange  at  Munich,  founded  in  1834 ;  the 
Bank  of  Leipzig,  in  1839  ;  the  Communal  Bank  of  Breslau, 
in  1848 ;  the  Communal  Bank  of  Chemnitz,  in  1848  ;  the 
Bank  of  United  Deposits  of  Berlin,  in  1850 ;  the  Bank  of 
Rostock,  in  1850;  the  Bank  of  Weimar,  in  1853  ;  the  Bank 
of  Gera,  in  1854  ;  the  Bank  of  Frankfort,  in  1854  ;  the  Bank 
of  Southern  Germany,  at  Darmstadt,  in  1855  ;  the  Bank  of 
Cologne,  in  1856  ;  the  Bank  of  Magdeburg,  in  1856  ;  the  Pri- 
vate Bank  of  Lubeck,  in  1856  ;  the  Territorial  Bank  of  Hesse, 
at  Homburg,  in  1856  ;  the  Bank  of  Hanover,  at  Hanover, 
in  1856  ;  the  Private  Bank  of  Gotha,  in  1856  ;  the  Bank  of 
Central  Germany,  at  Meiningen,  in  1856  ;  the  Bank  of  Lower 
Saxony,  at  Buckebourg,  in  1856 ;  the  Bank  of  Dantzig,  in 
1857  >  the  Bank  of  Pozen,  in  1857  J  tne  Bank  of  Brunswick, 
in  1857  ;  the  Commercial  Bank  of  Lubeck,  in  1865  ;  the 
Bank  of  Saxony,  at  Dresden,  in  1865  ;  the  Territorial  Bank 
of  Gorlitz,  in  1866  ;  the  Bank  of  United  Deposits,  at  Leipzig, 
in  1867  ;  the  Territorial  Bank  of  Oldenburg,  in  1868  ;  the 
Bank  of  Baden,  at  Mannheim,  in  1870  ;  and  the  Bank  of 
Wurtemburg  at  Stuttgard,  in  1871.  The  Prussian  banks  in 
this  list  are  those  at  Stettin,  Breslau,  Cologne,  Gorlitz, 
Magdeburg,  Dantzig,  and  Pozen,  and  the  Bank  of  United 
Deposits  at  Berlin. 

Many  of  these  banks  were  born  of  the  financial  necessities 
of  the  governments  by  which  they  were  chartered  and  were 
under  obligations  to  aid  the  public  Treasury.  The  Bank  of 
Homburg  was  required  to  loan  to  the  government  up  to  a 
maximum  of  100,000  florins  ($42,000)  at  three  per  cent. ;  the 
Bank  of  Gotha  was  required  to  advance  to  the  Treasury 
a  maximum  sum  of  200,000  thalers  ($150,000)  at  four  per 


1 88          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

cent.  ;  the  Bank  of  Bremen  was  required  to  loan  a  maximum 
of  200,000  thalers,  and  the  Bank  of  Buckebourg  was  under 
obligations  to  make  advances  to  the  amount  of  400,000 
thalers  without  interest,  on  the  condition  that  the  government 
deposit  public  securities  paying  an  interest  of  four  per  cent.1 
The  State  exercised  a  more  or  less  complete  control  over  all 
these  local  banks,  in  some  cases  appointing  the  officials  and 
in  others  limiting  its  action  to  inspection  and  suggestion. 
The  Banks  of  Bremen  and  Frankfort  were  among  those  en- 
joying comparative  freedom,  being  subject  only  to  public 
control  when  it  was  judged  desirable. 

The  operations  of  these  banks  before  1875  consisted,  like 
the  operations  of  the  Bank  of  Prussia,  in  the  discount  of 
commercial  paper,  the  negotiations  of  foreign  and  domestic 
bills  of  exchange,  advances  upon  public  stocks  and  the  pre- 
cious metals  and  in  some  cases  upon  mortgages,  and  the 
pledge  of  securities  and  property.  The  building  of  railways, 
the  increased  productive  power  of  the  community,  and  the 
consequent  increase  in  capital,  brought  a  rapid  extension  of 
business  to  the  German  banks  during  the  ten  years  before 
they  become  subordinate  to  the  German  Imperial  Bank. 
The  aggregate  commercial  discounts  of  all  except  the  Bank 
of  Prussia  increased  from  126,629  in  number  and  693,420,- 
537  marks  ($167,000,000)  in  amount  in  1867  to  535,302  in 
number  and  2,797,759,142  marks  ($675,000,000)  in  amount 
in  1874.  The  management  of  the  local  state  banks  was  for 
the  most  part  prudent  and  conservative  and  they  were  doing 
a  safe  and  profitable  business  when  they  were  arrested  in 
their  growth  by  the  policy  of  consolidation.  Most  of  them 
had  branches  in  the  neighboring  towns  and  cities,  reaching 
a  total  of  nearly  fifty  establishments  besides  the  parent  banks. 
They  were  required  by  the  laws  of  most  of  the  states  to  set 
aside  a  portion  of  their  profits  as  a  reserve  fund  and  this  fund 
increased  from  12,270,712  marks  ($3,000,000)  in  1867  to  34,- 
332,457  marks  ($8,200,000)  in  1875. 

The  aggregate  circulation  of  the  banks  outside  the  Bank 


1  Noel,  I.,  263. 


THE  BANKS  OF  GERMANY.  189 

of  Prussia  was  181,635,305  marks  ($45,000,000)  in  1867,  242,- 
502,653  marks  in  1869,  432,799,730  marks  in  1872  and  487,- 
020,519  marks  in  1874.  The  circulation  of  the  Bank  of 
Prussia  on  the  latter  date  was  838,422,000  marks,  making 
a  total  bank-note  circulation  for  all  the  states  of  Germany 
of  1,325,442,519  marks  ($320,000,000).  The  banks  showing 
the  largest  circulation  in  1874  were  those  at  Dresden,  99,727,- 
440  marks  ;  at  Mannheim,  51,901,428  marks  ;  at  Darmstadt, 
46,327,015  marks  ;  at  Frankfort,  45,208,833  marks  ;  at  Leip- 
zig, 28,464,069  marks;  at  Stuttgard,  25,477,028  marks ;  and 
at  Meiningen,  24,000,000  marks. 

The  narrow  limits  of  many  of  the  German  states  and  their 
commerce  with  each  other  led  to  the  mutual  circulation  of 
their  bills  in  spite  of  the  absence  of  any  legal  tender  quality 
even  within  the  limits  of  the  state  where  they  were  issued.1 
The  banks  of  some  of  the  smaller  states  took  advantage  of 
the  wide  circulation  of  their  bills,  and  the  lack  of  require- 
ments for  prompt  redemption,  by  swelling  their  issues  and 
by  various  artifices  for  getting  the  notes  into  circulation  at 
distant  points.  Though  legally  redeemable  in  coin  on  de- 
mand, the  small  denominations  of  the  notes  and  the  diffi- 
culty of  getting  them  to  the  counters  of  the  issuing  banks 
threatened  to  create- a  practically  irredeemable  and  redundant 
currency,  which  would  expel  coin  and  bring  the  country  to 
a  paper  basis.  "  They  might  without  difficulty  have  reme- 
died this  abuse,"  says  M.  Courcelle-Seneuil,  "by  means  of 
a  system  of  mutual  exchange  and  liquidation  among  the 
banks  themselves,  such  as  is  practised  in  Scotland,  and  the 
principal  banks  had  in  their  hands  every  power  to  enforce 
this  exchange  upon  the  banks  of  the  small  states."  a  But 
other  means  of  reaching  the  difficulty  were  adopted,  and  the 
initiative  was  taken  by  Prussia,  which  passed  an  act  on  May 
14,  1855,  forbidding  the  circulation  within  her  limits  of  for- 


1  The  legal  tender  quality  was  not  given  by  law  to  the  notes  of  any 
of  the  German  banks  and  was  expressly  disclaimed  by  the  laws  in- 
corporating the  banks  of  Pomerania,  of  Frankfort,  of  Homburg,  of 
Meiningen,  and  of  the  United  Deposits  at  Berlin. — Noel,  I.,  284. 

2  Traite  des  Operations  de  Banque,  366. 


190          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

eign  bills  payable  to  bearer,  without  interest,  of  a  value 
below  ten  thalers.  Saxony  took  similar  action  on  July  8, 
1855,  and  the  small  states  of  Thuringia  concluded  a  conven- 
tion January  21,  1856,  by  which  they  forbade  the  circulation 
of  foreign  bills  to  bearer  without  interest  and  below  ten 
thalers  in  denomination,  with  the  exception  of  the  bank 
drafts  of  Prussia  and  Saxony.  The  Grand  Duchy  of  Baden 
forbade  the  circulation  of  any  foreign  bills  on  December  24, 
1855,  except  those  issued  in  Prussia,  Bavaria,  and  Nassau 
and  at  Frankfort.  Prussia  extended  the  scope  of  her  pro- 
hibition on  May  25,  1857,  to  all  foreign  bills  except  those 
below  ten  thalers  issued  by  the  governments  of  Saxony, 
Thuringia,  and  Anhalt.  A  Saxon  ordinance  of  May  18, 
1857,  imposed  a  fine  of  fifty  thalers  upon  the  holders  of  for- 
eign bills  below  the  denomination  of  ten  thalers  except 
upon  banks  of  issue  which  carried  on  a  special  service  of 
exchange.1 

The  history  of  the  circulation  of  these  state  bills  outside 
of  the  limits  of  the  issuing  state  suggests  an  interesting 
comparison  with  the  circulation  of  the  notes  of  the  depart- 
mental banks  of  France  and  of  the  State  banks  of  the  United 
States.  The  banks  were  not  in  any  of  these  cases  closely 
linked  together  by  clearing  arrangements  and  the  means  of 
communication  and  the  promptness  of  commercial  transac- 
tions were  not  such  as  to  result  in  the  prompt  return  of  the 
notes  to  the  issuing  banks  for  redemption.  It  does  not 
appear  that  this  resulted  in  a  great  inflation  of  the  note 
issues,  even  in  the  United  States,2  but  it  naturally  aroused 
fears  that  the  banks  might  not  be  able  to  redeem  their  notes 
promptly  on  presentation  and  that  they  might  fall  below  par 


1  Noel,  I.,  288. 

2  M.  Wolowski,  who  is  one  of  the  warmest  champions  of  monopoly 
of  note  issues,  speaking  of  the  situation  in  1863,  says:   "Twenty 
banks  issuing  45,000,000  thalers  ($33,000,000)  for  thirty-two  states 
whose  population  exceeded  thirteen  millions,  is  not  too  much  as  to 
quantity ;    it  is  too  much  because  of  the  embarrassment  which  is 
caused   by   this   diversity   of  monetary   signs." — La    Question   des 
Banques,  404. 


THE  BANKS  OF  GERMANY.  191 

in  coin.  The  situation  in  France  differed  from  that  in  Ger- 
many and  the  United  States  in  the  respect  that  the  notes  of 
the  departmental  banks  were  made  legal  tender  after  the 
revolution  of  1848  within  the  department  where  they  were 
issued,  but  were  forced  into  an  inferior  position  by  the  notes 
of  the  Bank  of  France,  which  were  legal  tender  throughout 
the  republic.  The  circulation  of  the  bank-notes  of  Germany 
and  the  United  States  without  the  legal  tender  quality  might 
have  been  maintained  at  par  with  coin  (from  which  they  do 
not  seem  to  have  departed  in  Germany)  under  a  system  of 
closer  union  among  the  banks  and  prompter  means  of  com- 
munication. 

The  government  of  Prussia  took  action  as  early  as  1846 
towards  the  centralization  of  the  banking  system,  by  the 
ordinance  of  October  5th,  which  provided  that  the  provin- 
cial banks  of  the  Kingdom  should  cease  their  operations 
when  the  Bank  of  Prussia  should  lose  its  special  privileges. 
Another  act,  which  indicated  the  purpose  of  the  government 
to  keep  matters  in  its  own  hands,  was  the  law  of  May  7, 
1856,  renewing  the  privileges  of  the  Bank  of  Prussia,  but 
reserving  to  the  executive  power  the  right  at  the  end  of  1871 
and  every  ten  years  thereafter  to  dissolve  the  bank  and  re- 
turn the  capital  to  the  shareholders.  This  provision  neces- 
sarily exposed  the  other  banks,  under  the  ordinance  of  1846, 
to  dissolution  as  banks  of  issue  at  the  end  of  the  same  period. 
The  law  remained  in  this  condition  until  the  reorganization 
of  the  North  German  Confederation  under  the  headship  of 
Prussia  in  1867.  A  provision  was  then  incorporated  in  the 
constitution  of  North  Germany  confiding  to  the  Federal  As- 
sembly exclusively  the  regulation  of  banks  of  issue.  The 
power  remained  in  abeyance  for  a  few  years,  when  the  law 
of  March  27,  1870,  reserved  to  the  Confederation  the  right 
of  granting  the  power  of  issue  or  of  increasing  the  monetary 
circulation.  The  law  stipulated  that  the  renewal  of  the 
privilege  of  issue  should  not  henceforth  be  granted  except 
upon  the  condition  that  it  might  be  revoked  at  any  time 
upon  preliminary  notice  of  one  year.  It  was  also  provided 
that  where  a  bank  possessed  the  right  of  issue  for  a  definite 


I92          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

term,  subject  to  preliminary  notice  of  withdrawal,  this  notice 
should  be  regarded  as  having  been  given. 

The  monetary  system  of  Germany  called  for  radical  re- 
form, without  regard  to  the  banking  policy  adopted,  in  order 
to  facilitate  exchanges  among  the  German  states  and  with 
foreign  countries.  The  coins  were  of  such  different  denomi- 
nations and  degrees  of  abrasion  that  heavy  exchange  charges 
were  levied  on  the  borders  of  every  little  state  and  possible 
profits  on  merchandise  were  almost  neutralized  by  this  loss. 
Several  conventions  to  simplify  the  monetary  system  were 
held  before  the  unification  of  the  Empire,  one  of  the  latest  at 
Vienna  on  January  24,  1857.  The  basis  of  an  agreement 
was  then  prepared  abrogating  the  old  systems  and  adopting 
one  based  upon  the  new  pound  of  five  hundred  grams  which 
was  in  use  in  several  continental  countries.  Germany  was 
divided  by  this  convention  into  three  zones.  Silver  was 
treated  as  the  single  standard  of  value  and  was  to  be  coined 
into  two  forms, — the  thaler,  equivalent  to  a  florin  and  three- 
quarters,  and  the  florin,  worth  four-sevenths  of  a  thaler. 
It  was  proposed  to  coin  thirty  thalers  out  of  a  pound  of  five 
hundred  grams  of  fine  silver  for  use  in  the  Northern  States 
and  fifty-two  and  a  half  florins  out  of  a  pound  for  use  in  the 
South.  Other  silver  pieces  of  one  and  two  thalers  were  to 
be  coined  with  special  devices,  under  the  name  of  the  union 
thaler  (  Vereinthaler),  for  trade  between  North  and  South 
Germany,  and  were  to  be  received  by  public  depositories  as 
lawful  money. 

Silver  constituted  the  principal  metallic  stock  of  Germany 
and  of  the  cash  resources  of  the  local  banks  up  to  the  time 
of  the  monetary  reform.  Gold  figured  somewhat  in  the  cir- 
culation, but  it  was  not  a  legal  tender.1  The  gold  pieces, 
coined  under  the  convention  of  1857  according  to  mint  re- 


1  Mr.  Shaw  declares  that  the  convention  in  1857  had  a  part  of  its 
motive  in  the  wish  by  the  German  States  "  to  protect  that  part  of 
their  currency  system  which  was  threatened  by  bimetalic  law,"  and 
that  France  drew  gold  from  Germany  as  well  as  from  California  and 
Australia  as  the  result  of  the  change  in  the  ratio. — History  of  Cur- 
rency, 205-11. 


THE  BANKS  OF  GERMANY.  193 

gulations,  were  to  be  received  at  a  valuation  in  standard  sil- 
ver money  known  as  "  the  bank  rate,"  which  was  fixed  in 
advance  for  six  months  and  was  never  to  be  higher  than  the 
mean  quotations  in  the  market.  The  character  of  the  circu- 
lating medium  was  further  complicated  by  a  circulation  of 
government  paper  money,  which  was  issued  by  every  Ger- 
man state  except  the  principality  of  L,ippe  and  the  three  free 
cities  of  Hamburg,  Bremen,  and  lyubeck.  The  adoption  of 
the  gold  standard  was  first  formally  recommended  by  a  com- 
mercial convention  of  one  hundred  and  nineteen  German 
cities  which  sat  at  Berlin  between  October  20,  and  October 
23,  1868. 1  A  resolution  was  presented  by  Dr.  Adolph  Soet- 
beer,  who  was  the  official  reporter  on  the  subject  of  the 
standard  at  an  earlier  session  held  in  September,  1865,  de- 
claring that  "a  monetary  unity,  and  at  the  same  time  such  a 
general  monetary  reform  as  befits  the  age,  can  be  brought 
about  by  the  adoption  simultaneously  by  all  the  German 
States  of  the  single  standard  with  full  application  of  the 
decimal  system,  in  pursuance  of  the  principles  recommended 
by  the  International  Monetary  Conference  of  Paris  in  its  re- 
port of  July  6,  1867."  This  resolution  was  adopted,  includ- 
ing the  recommendation  of  a  unit  of  value  equivalent  to  the 
gold  five-franc  piece,  and  the  public  authorities  were  recom- 
mended to  put  it  in  force  not  later  than  January  i,  1872,  when 
the  new  system  of  weights  and  measures  already  adopted  by 
the  North  German  Confederation  took  effect.2 

The  payment  of  the  great  war  indemnity  by  France  gave 
Germany  the  opportunity  to  carry  out  the  recommendations 
of  her  leading  economists,  that  she  adopt  the  gold  standard. 
The  direct  payments  in  French  gold  were  only  273,003,058 
francs  ($52,600,000),  but  the  power  given  the  German  gov- 
ernment to  draw  the  proceeds  of  bills  of  exchange  upon 
L,ondon  and  Paris  gave  them  access  in  a  large  measure  to  the 

1  Appendix  to  American  Report  on  International  Monetary  Confer- 
ence of  1878,  Sen.  Ex.  Doc.  58,  45th  Congress,  Third  Ses.,  727. 

2  M.  Allard,  the  honorary  director  of  the  Belgian  mint,  declares  that 
silver  was  "  academically  demonetized  "  by  the  vote  of  the  Paris  Con- 
ference.— La  Crise  Agricole  et  Monetaire,  41. 


194          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

gold  of  the  world.  The  German  government  kept  an  ac- 
count with  the  London  Joint-Stock  Bank  which  was  believed 
to  run  as  high  as  ^4,000,000  ($20,000,000)'  and  by  watching 
the  market  were  able  to  rapidly  carry  gold  into  Germany. 
The  law  establishing  a  uniform  coinage  (Act  of  December 
4,  1871)  did  not  adopt  the  five-franc  piece  as  the  unit,  as 
recommended  by  the  convention  of  1868,  but  adopted  a  unit 
called  the  mark,  equivalent  to  one-third  of  a  Prussian  thaler, 
and  established  the  ratio  of  fifteen  and  a  half  to  one  between 
gold  and  silver.  The  provision  of  the  treaty  of  Vienna, 
providing  for  the  coinage  of  the  union  thaler  of  silver,  was 
repealed.  Gold  legal  tender  coins  were  provided  for,  but  the 
Imperial  gold  standard  was  not  fully  established  until  the 
coinage  act  of  July  9,  1873,  when  it  superseded  all  local 
standards  and  made  the  monetary  unit  the  mark  of  gold.2 
The  Imperial  silver  coinage  was  to  be  carried  on  on  govern- 
ment account,  and  limited  to  ten  marks  per  capita,  and  was  to 
be  a  legal  tender  for  only  twenty  marks  between  individuals, 
but  payable  in  any  sum  to  the  government.  The  new  sil- 
ver coins  were  made  mere  token  coins,  by  reducing  the  weight 
of  the  fine  silver  eleven  and  one-ninth  per  cent,  below  the 
full  weight  at  the  ratio  of  fifteen  and  a  half  to  one  and  coin- 
ing a  pound  of  fine  silver  into  one  hundred  marks  and  a 
pound  of  fine  gold  into  1395  marks. 

One  of  the  interesting  incidental  results  of  the  new  coinage 
laws  was  the  termination  of  the  career  of  the  old  Bank  of 
Hamburg,  which  had  for  more  than  two  and  a  half  centuries 
been  carried  on  on  the  principles  of  the  Bank  of  Venice  and 
the  Bank  of  Amsterdam.  The  accounts  of  the  bank  were 
kept  in  marks  banco,  representing  a  bank  credit  of  the  uni- 
form value  of  half  a  thaler  (37^  cents),  and  its  notes  were 
redeemable  in  silver.  The  Bank  of  Hamburg,  founded  in 
1619,  was  the  last  survivor  of  the  medieval  banks,  created 

1  Bagehot,  Lombard  Street,  Works,  V.,  199-202. 

*  The  exact  equivalent  of  the  mark  in  American  gold  coin  is  twenty- 
three  and  eight-tenths  cents,  but  for  convenience  of  computation  in 
dealing  with  large  figures  it  is  treated  in  this  work  as  substantially 
equal  to  a  quarter  of  a  dollar. 


THE   BANKS   OF   GERMANY.  195 

for  the  purposes  of  foreign  commerce.  Accounts  could  be 
opened  only  by  a  Hamburg  citizen  or  corporation  and  were 
transferred  only  upon  his  appearance  in  person  or  by  attor- 
ney with  a  transfer  order.  The  principle  upon  which  the 
bank  was  conducted  was  the  granting  of  a  credit  on  the 
books  for  the  silver  or  gold  deposited.  No  loans  were  made 
and  no  notes  or  other  liabilities  were  created  beyond  the 
amount  of  coin  and  bullion  on  deposit.  So  faithfully  was 
this  rule  adhered  to  that  when  the  French  on  November  5, 
1813,  took  possession  of  the  bank  they  found  7,506,956 
marks  in  silver  held  against  liabilities  of  7,489,343  marks. 
They  removed  a  large  part  of  the  treasure  before  the  free- 
dom of  Hamburg  was  re-established  on  June  i,  1814,  but  the 
bank  resumed  business  with  unimpaired  credit  and  the 
thefts  of  Napoleon's  forces  were  made  good  in  1816  by  a 
transfer  of  French  securities.  Modern  banking  methods 
were  gradually  introduced  into  the  Bank  of  Hamburg  and  a 
capital  was  accumulated  of  about  1,000,000  marks  ($250,000) 
in  addition  to  the  buildings.  The  bank  survived  the  storm 
of  the  crisis  of  1857,  only  to  fall  under  the  decrees  establish- 
ing the  new  German  monetary  system,  which  ordered  the 
bank  to  liquidate  its  accounts  in  fine  silver  by  February  15, 
1873.  The  latest  reference  to  its  existence  is  found  in  the 
proceedings  of  the  Hamburg  Senate  on  October  13,  1875, 
declaring  their  purpose  to  sell  to  the  Bank  of  Germany  for 
900,000  marks  the  buildings  of  "  the  venerable  institution 
which  had  performed  such  great  services  to  German  trade."1 
The  accumulation  of  a  stock  of  gold  was  begun  by  the  Im- 
perial  Bank  and  the  government,  and  the  purchases  of  gold 
by  the  bank,  from  January  i,  1876,  to  the  end  of  1893, 
amounted  in  American  money  to  $434,890,067.  The  coin- 
age of  Imperial  gold  coins  from  1872  to  the  close  of  1893 
reached  2,737,790,915  marks  and  the  aggregate  coinage  of 
silver  484,048,609  marks.  The  sales  of  silver  by  the  govern- 
ment up  to  March  31,  1893,  represented  a  coining  value  of 
672,862,729  marks,  but  the  amount  actually  received  was 


1  Palgrave,  Dictionary  of  Political  Economy,  I.,  105. 


196          HISTORY  OF  MODERN  BANKS   OF  ISSUE. 

574>°55,532  marks,  showing  a  loss  of  98,807,197  marks.1 
The  bulk  of  the  sales  were  made  before  May  16,  1878,  before 
the  great  decline  in  the  price  of  silver,  and  the  highest  price 
per  kilogram  was  obtained  in  the  period  of  the  largest  sales, 
between  September  30,  1876,  and  September  30,  i877.a  The 
profit  on  the  gold,  silver,  and  subsidiary  coinage,  taking 
these  coins  at  their  face  value,  was  96,380,330  marks,  and 
the  cost  of  recoinage  added  to  the  loss  on  silver  was  127,894,- 
218  marks,  showing  a  net  loss  of  31,513,888  marks. 

The  banking  system  of  the  Empire  was  unified  in  a  meas- 
ure by  the  provisions  of  the  law  of  July  9,  1873,  that  bank 
bills  should  be  withdrawn  from  circulation  before  January  i, 
1876,  if  their  value  was  not  declared  in  Imperial  marks,  and 
that  the  smallest  notes  should  be  for  100  marks  ($23.80). 
The  work  of  unification  was  completed,  so  far  as  it  was 
possible  to  complete  it,  by  the  Imperial  law  of  March  14, 
1875,  which  was  supplemented  by  the  Prussian  law  of 
March  27th  and  a  convention  between  Prussia  and  the  Em- 
pire on  May  i7th  and  i8th  following.  The  Royal  Bank  of 
Prussia  was  directed  to  cease  its  operations  on  December  31, 
1875,  and  to  transfer  its  rights  and  privileges  to  a  new  bank, 
known  as  the  Bank  of  the  Empire  (Reichsbanfc).  The  gov- 
ernment of  Prussia  was  allowed  to  withdraw  its  capital  of 
1,906,800  thalers  in  the  old  institution  and  the  half  of  the 
reserve  fund  belonging  to  it.  The  Prussian  government  was 
further  compensated  for  the  surrender  of  its  rights  in  the 
bank  by  an  indemnity  of  15,000,000  marks  ($3,750,000), 
paid  from  the  Treasury  of  the  Empire,  and  a  pledge  that 

1  The  equivalent  for  these  sums  in  American  money,  as  given  in 
the  American  translation  of  the  Report  of  the  Berlin  Silver  Commis- 
sion of  1894,  are  :  Gold  coinage,  $651,594,221  ;  silver  coinage,  $115,- 
203,549  ;  face  value  of  silver  coins  sold,  $160,141,329  ;  price  received, 
$136,625,216;   loss  on   sales,   $23,516,113;    net  loss  after  deducting 
profits,  $7,500,308. — Sen.  Mis.  Doc.  274,  pt.  I.,  Fifty-third  Congress, 
Second  Session,  33-36. 

2  The  sales  during  this  period  were  not  far  short  of  half  of  the 
whole,  being  1680.4  kilograms  and  representing  a  face  value  of  302,- 
500,000  marks.     The  average  price  of  silver  in   1876  was  $1.156  per 
ounce  and  in  1877,  $1.201  per  ounce. 


THE  BANKS  OF  GERMANY.  197 

the  new  bank  should  continue  the  annual  payment  of  621,- 
910  thalers  ($465,000)  from  1876  to  1925  which  had  been 
agreed  upon  by  the  Bank  of  Prussia  in  I856.1  The  Imperial 
government  agreed  to  be  responsible  for  this  annuity  in  case 
the  privileges  of  the  bank  were  not  continued.  The  share- 
holders of  the  Bank  of  Prussia  were  given  the  option  of 
receiving  back  their  capital  in  cash,  in  accordance  with  the 
pledge  of  the  Prussian  law  of  October  5,  1846,  or  receiving 
shares  of  equal  face  value  with  their  existing  holdings  in  the 
new  Imperial  Bank.  The  new  bank  on  these  conditions 
succeeded  to  all  the  rights  and  obligations  of  the  Bank  of 
Prussia.  The  Chancellor  of  the  Empire  was  authorized  to 
acquire  the  bank  shares  which  should  be  exchanged  for  the 
shares  of  the  Bank  of  Prussia  and  to  issue  interest-bearing 
Treasury  bonds  maturing  not  later  than  May  i,  1876,  to  the 
amount  of  the  shares  not  issued,  in  order  to  complete  the 
capital  of  the  new  institution.  The  capital  was  fixed  by  law 
at  120,000,000  marks  and  was  divided  into  40,000  shares  of 
3000  marks  ($750)  each,  of  which  19,919  shares  replaced  the 
shares  of  the  Bank  of  Prussia  which  the  holders  had  chosen 
to  convert ;  20,000  shares  were  placed  by  public  subscrip- 
tion, and  8 1  by  means  of  sales  on  the  Bourse. 

The  organization  of  the  Imperial  Bank  made  it  entirely  a 
private  institution  as  to  ownership,  but  essentially  a  public 
one  in  its  management.  "  In  fact,"  says  M.  Octave  Noel, 
"  the  establishment  is  closely  bound  to  the  state  and  is  only 
able  to  move,  think  or  act  when  the  state  manifests  in  some 
manner  its  presence  and  affirms  its  control."  The  official 
control  over  the  bank  is  confided  to  a  council  of  curators, 
composed  of  the  Chancellor  of  the  Empire,  who  is  President, 
and  four  other  members,  one  named  by  the  Emperor  and  the 
other  three  by  the  Federal  Council.  The- direction  of  the 
policy  of  the  bank  is  so  completely  under  the  orders  of  the 
Chancellor  that  in  case  of  his  absence  or  impeachment  the 
presidency  of  the  Council  is  vested  temporarily  in  an  official 
named  by  the  Emperor.  The  Chancellor  or  his  substitute 


Noel,  I.,  248. 


198  HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

directs  the  entire  administration  and  issues  the  instructions 
to  the  council  of  direction,  to  the  branches  and  to  the  em- 
ployees of  the  bank.  The  committee  of  curators  meet  every 
three  months  and  examine  reports  regarding  the  bank's 
condition  and  the  operations  which  are  being  carried  on. 
The  administrative  authority  is  vested  in  a  directorate  com- 
posed of  a  president  and  a  number  of  members  named  for 
life  by  the  Imperial  government  upon  the  nomination  of  the 
Federal  Council.  The  official  force  of  the  bank,  although 
paid  from  the  funds  of  the  institution,  are  subject  to  the 
same  obligations  and  enjoy  the  same  privileges  as  the  public 
employees  of  the  Kmpire.  Honors  and  pensions  are  ac- 
corded them,  benefits  are  voted  to  the  families  of  deceased 
employees,  the  number  of  posts  and  the  salaries  are  included 
in  the  Imperial  budget,  and  the  accounts  are  subject  to  the 
control  of  the  accounting  officers  of  the  Empire.  The  em- 
ployees of  the  bank,  moreover,  are  forbidden  by  law  to  hold 
stock  in  the  institution. 

The  influence  of  the  private  owners  is  exerted  through  a 
central  commission  of  fifteen  members  and  fifteen  alternates, 
elected  by  the  general  assembly  of  the  shareholders  from 
their  own  numbers.  These  commissioners  are  required  to 
possess  in  their  own  right  not  less  than  three  shares,  to  have 
their  domicile  within  the  Empire,  and  nine  members  and  nine 
alternates  are  required  to  be  residents  of  Berlin.  A  third 
of  the  board  is  elected  every  year  and  the  members  are 
eligible  for  re-election.  Many  of  the  business  details  of  the 
management  of  the  bank  are  remitted  to  this  central  com- 
mission, so  long  as  their  course  does  not  meet  the  disap- 
proval of  the  Imperial  authorities.  They  are  required  to 
examine  at  least  each  month  the  weekly  reports,  to  inspect 
the  deposit  accounts,  and  to  determine  what  proportion  of 
the  bank  funds  shall  be  used  in  advances  and  in  the  purchase 
of  paper,  what  the  rate  of  discount  shall  be,  and  what  ar- 
rangements shall  be  made  with  other  German  banks.  A 
still  smaller  body  of  three  members  of  the  central  commis- 
sion is  charged  with  the  daily  supervision  of  the  bank's  af- 


THE  BANKS  OF  GERMANY,  199 

fairs  and  they  are  authorized  to  sit  at  all  meetings  of  the 
directorate  with  consulting  powers. 

The  note  circulation  of  the  Imperial  Bank  is  based  largely 
upon  the  English  banking  act  of  1844,  but  with  an  impor- 
tant modification  which  adds  greatly  to  the  ability  of  the 
bank  to  provide  accommodation  in  times  of  stringency. 
There  is  a  fixed  limit  of  authorized  circulation,  against  which 
cash  or  its  equivalent  must  be  held  in  the  proportion  of  one- 
third,  and  issues  beyond  this  limit  must  be  covered  in  cash 
for  the  full  amount.  The  cash  reserve  of  one-third  in  the 
one  case  and  one  hundred  per  cent,  in  the  other  may  consist 
of  money  having  currency  in  Germany,  Imperial  Treasury 
bonds,  gold  bullion,  or  foreign  gold  coin.  The  notes,  there- 
fore, are  issued  against  the  general  assets  of  the  bank,  which 
remain  wholly  within  its  own  control  and  are  not  set  aside 
by  specific  designation  or  prior  lien  for  the  security  of  the 
note  holders.  The  law,  says  Prof.  Dunbar,  "has  simply 
provided  by  suitable  measures  that  the  affairs  of  the  bank, 
including  its  issue  of  notes  and  the  money  and  securities 
held  by  it,  shall  meet  certain  tests  of  soundness,  believing 
that  both  the  ultimate  solvency  of  the  bank  and  the  prompt 
payment  of  its  circulation  are  thus  made  secure."1  The 
limit  of  authorized  circulation  was  fixed  by  the  law  of  March 
14,  1875,  at  250,000,000  marks  ($60,000,000)  but  the  same 
law  provided  that  when  any  existing  bank  of  circulation 
should  surrender  its  right,  either  by  liquidation  or  by  refusal 
to  accept  the  conditions  imposed  by  the  new  law,  the  amount 
of  the  circulation  might  be  assumed  by  the  Imperial  Bank. 
Seventeen  banks  surrendered  their  right  to  issue  notes  soon 
after  the  adoption  of  the  new  system  and  their  action  added 
26,085,000  marks  to  the  authorized  circulation  of  the  Im- 
perial Bank.  This  has  since  been  increased  to  42,117,000 
marks.2  The  two- thirds  of  the  authorized  circulation  not 
covered  by  the  cash  reserve  are  required  to  be  covered  by 


1  Theory  and  History  of  Banking,  195. 

2  Raffalovich,  Marche  Financier  en  1893-4,  67. 


200          HISTORY  OF  MODERN  BANKS   OF  ISSUE. 

bills  of  exchange  maturing  in  not  more  than  three  months 
and  bearing  not  less  than  two  solvent  names. 

The  novel  feature  of  the  German  system  of  circulation  is 
the  authority  given  to  the  Imperial  Bank  to  exceed  the  statu- 
tory limit  of  note  issue  without  metallic  security,  upon  the 
payment  of  a  tax  at  the  rate  of  five  per  cent,  per  year  upon 
the  excess  of  circulation.  Weekly  reports  are  required  by 
the  government  and  upon  the  excess  of  circulation  shown 
above  the  limit  a  tax  of  T5-g-  per  cent,  is  at  once  assessed,  rep- 
resenting approximately  the  tax  for  a  single  week  at  the  rate 
of  five  per  cent,  a  year.  This  provision  permits  increased 
issues  when  there  is  stringency  enough  in  the  money  market 
to  carry  current  discount  rates  above  five  per  cent,  but  drives 
the  new  notes  promptly  out  of  circulation  when  the  discount 
rate  falls.  The  operation  of  the  rule,  which  has  been  several 
times  availed  of  by  the  Imperial  Bank  and  by  other  German 
banks,  has  proved  salutary  in  averting  such  stringency  as 
has  been  felt  in  Kngland  under  the  Act  of  1844,  while  it  has 
kept  the  circulation  within  the  limits  set  by  the  needs  of 
business. 

The  first  issues  of  the  Imperial  Bank  subject  to  the  five 
per  cent,  tax  occurred  in  December,  1881,  and  were  repeated 
in  September  and  October,  1882;  in  December,  1886;  and 
three  times  in  the  latter  part  of  1889,  when  the  excess  above 
the  limit  ran  as  high  as  109,473,000  marks  ($26,000,000). 
The  limit  was  exceeded  in  1890  by  26,250,000  marks  ($6,500,- 
ooo),  but  at  the  end  of  1891  the  reserve  had  been  so  increased 
that  the  note  issues  were  101,407,000  marks  below  the  limit. 
This  margin  was  reduced  to  16,764,000  marks  ($4,000,000) 
at  the  end  of  1892,  and  the  bank  was  compelled  in  February, 
1893,  to  Pass  tne  limit,  to  maintain  an  excess  of  circulation 
until  March  3oth,  and  to  avail  itself  again  of  the  privilege  of 
passing  the  limit  on  May  23d.  The  bank  was  8,000,000 
marks  within  the  limit  at  the  end  of  the  year  and  123,000,- 
ooo  marks  within  it  at  the  end  of  1894.  The  occasion  of  the 
high  interest  rates  and  the  demand  for  money  in  1893  was 
the  withdrawal  of  deposits  from  Berlin  by  the  Russian  gov- 
ernment, the  effort  of  Austria-Hungary  to  restore  specie 


THE  BANKS  OF  GERMANY.  2OI 

payments,  the  heavy  offerings  of  Italian  bonds  and  the  im- 
portant financial  events  in  India,  Australia,  and  the  United 
States.1  The  years  1894  and  1895  passed  with  slight  excess 
of  the  circulation  above  the  limit. 

The  rate  of  discount  charged  by  the  Imperial  Bank  has 
averaged  4.04  per  cent,  since  its  organization  on  January  i, 
1876.  The  variations  have  not  exceeded  seven  in  any  one 
year  and  have  usually  been  fewer.  The  mean  from  1876  to 
1 88 1  was  4.42  per  cent.  ;  from  1882  to  1887,  4.57  per  cent.  ; 
and  from  1889  to  1893,  3-82  Per  cent-  The  mean  rates  for 
the  past  six  years  have  been  4.51  in  1890  ;  3.78  in  1891  ;  3.20 
in  1892  ;  4.06  in  1893  J  3- rl  in  l894  5  and  3-H  in  l895-  The 
rate  in  1893  was  permanently  higher  than  for  a  long  period. 
It  began  at  four  per  cent.,  and  was  reduced  on  January  i7th 
to  three  per  cent.,  but  was  advanced  on  May  i2th  to  four  per 
cent,  and  on  August  nth  to  five  per  cent.,  where  it  remained 
until  January  9,  1894.  It  was  then  reduced  to  four  per  cent. , 
and  on  February  5th  to  three  per  cent.,8  where  it  remained 
until  November,  1895,  when  it  was  advanced  to  four  per 
cent. 

The  local  banks  of  Germany  were  brought  by  the  law  of 
1875  under  the  same  rules  as  the  Imperial  Bank  and  drastic 
regulations  were  enforced  to  compel  them  to  comply  with  the 
new  law  or  abandon  the  issue  of  circulating  notes.  The 
purpose  of  the  new  legislation,  to  bring  the  control  of  the 
bank-note  circulation  as  soon  as  practicable  into  the  hands 
of  the  Imperial  Bank,  was  indicated  by  the  declaration  that 
the  power  to  issue  bank-notes  or  to  increase  circulation  be- 
yond the  limit  already  authorized  by  the  various  states  should 
be  granted  only  by  a  law  of  the  Empire.  Prussia  was  almost 
supreme  in  the  Federal  Council  and  there  was  little  likelihood 
that  she  would  consent  to  any  law  increasing  the  circulation 
of  the  local  banks.  The  long  duration  of  the  privilege  ac- 
corded to  some  of  them  was  cut  off  by  a  provision  that  their 
privileges  should  be  subject  to  revocation  on  January  I,  1891, 


1  Raffalovich,  Marchk  Financier  en  1893-4,  62-63. 
5  Raffalovich,  Marche  Financier  en  1894-5,  112. 


202          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

and  every  tenth  year  thereafter,  upon  one  year's  notice  and 
without  indemnit}^  if  they  accepted  the  power  of  note  issue 
involved  in  the  new  law.  Those  banks  which  were  not  dis- 
posed to  accept  the  new  conditions  were  dealt  with  in  a  man- 
ner similar  to  the  departmental  banks  of  France  after  the 
revolution  of  1848.  They  were  not  deprived  of  the  privilege 
of  issuing  notes,  but  they  were  forbidden  by  Article  42  of  the 
law  to  carry  on  banking  operations,  outside  the  limits  of  the 
state  which  had  given  them  the  privilege,  by  means  of 
branches  or  agents  or  to  hold  shares  in  other  banks.  An- 
other provision  (Article  43)  declared  that  "The  notes  of 
banks  having  the  privilege  of  note  issue  at  the  time  of  the 
promulgation  of  this  law,  shall  not  be  employed  in  payments 
outside  the  state  which  may  have  granted  them  the  privilege. 
The  exchange  of  these  notes,  however,  for  other  bank-notes, 
paper  money,  or  specie  is  not  subject  to  this  prohibition." 

Banks  which  saw  fit  to  submit  to  the  new  conditions  were 
treated  somewhat  more  favorably,  pending  the  extension  of 
the  branches  of  the  Imperial  Bank  throughout  the  Kmpire. 
They  were  governed  by  Article  44  of  the  law  and  were  sub- 
ject to  the  same  conditions,  as  to  the  classes  of  securities 
dealt  in,  the  character  of  the  commercial  paper  held,  the 
proportion  of  cash  reserve  to  circulation  and  the  payment  of 
benefits  to  the  state,  as  the  Imperial  Bank.  They  were  re- 
quired to  hold  security  for  their  circulation  to  the  amount  of 
one-third  in  money  having  currency  in  Germany,  in  Imperial 
Treasury  bonds,  in  gold  bullion  or  foreign  gold  coin.  The 
remaining  two-thirds  of  the  circulation  was  required  to  be 
protected  by  bills  of  exchange  running  for  not  more  than 
three  months  and  bearing  three  endorsements  or  not  less  than 
two  names  of  well-known  solvency.  They  were  required  to 
exchange  their  notes  for  German  money  having  currency  at 
Berlin,  or  Frankfort,  and  redemption  must  not  be  delayed 
beyond  the  morrow  of  the  presentation  of  the  note. 1  Banks 
accepting  these  conditions  obligated  themselves  to  receive  at 
their  face  value,  in  branches  established  in  cities  of  more 


1  Noel,  I.,  320-23. 


THE  BANKS  OF  GERMANY.  2O$ 

than  eighty  thousand  inhabitants  and  at  the  parent  bank 
the  notes  of  German  banks  whose  circulation  was  authorized 
throughout  the  Empire  and  which  were  redeemable  in  coin 
on  demand.  Bills  on  one  bank  thus  received  by  another 
could  be  used  only  in  the  settlement  of  balances  with  the 
bank  of  issue,  employed  in  payments  within  the  territory  of 
the  issuing  bank  or  presented  for  redemption.  Banks  de- 
siring to  conform  to  the  requirements  of  Article  44  were  re- 
quired to  present  to  the  Chancellor  of  the  Kmpire  the  evidence 
that  their  statutes  conformed  to  the  law  and  that  the  locality 
chosen  for  the  exchange  of  bills  (Berlin  or  Frankfort)  pos- 
essed  a  branch  ready  for  actual  operation. 

Much  feeling  was  aroused  among  the  German  banks  upon 
the  passage  of  this  law  and  fifteen  of  the  thirty-two  outside 
the  Bank  of  Prussia  promptly  abandoned  their  right  to  cir- 
culation, and  became  mere  private  banks  of  discount  and 
deposit,  rather  than  conform  to  all  the  requirements  of  the 
new  law.  The  Bank  of  Brunswick  took  the  bolder  course, 
which  it  was  believed  no  bank  would  be  able  to  maintain, 
of  refusing  to  comply  with  Article  44  and  continuing  its  cir- 
culation under  the  limitations  of  Articles  42  and  43.  The 
Bank  of  Brunswick,  therefore,  continued  to  issue  bills  which 
circulated  within  the  limits  of  the  duchy  and  braved  the  ef- 
forts of  the  Bank  of  Prussia  to  force  it  into  submission.  The 
Prussian  Bank  refused  to  receive  the  paper  of  the  Bank  of 
Brunswick  and  upon  the  failure  of  this  device  had  orders 
issued  to  the  postal  savings  banks  not  to  receive  the  notes 
of  the  bank  on  deposit.  The  latter  measure  threatened  to 
arouse  so  much  of  the  old  separatist  feeling  in  Germany  that 
it  was  abandoned  by  direction  of  the  Chancellor.  Frederick 
William  of  Brunswick  died  during  the  latter  part  of  1884, 
and  Prince  Albert  of  Prussia,  the  nephew  of  the  German 
Emperor,  was  elected  Duke  of  Brunswick  by  the  Diet  on 
October  21,  1885.  The  close  relations  thus  established  be- 
tween Brunswick  and  the  Imperial  government  soon  led  to 
the  compliance  of  the  Bank  of  Brunswick  with  the  provi- 
sions of  Article  44. 

The  purpose  to  clear  the  field  for  the  circulation  of  the  Im- 


204          HISTORY  OF  MODERN  BANKS   OF  ISSUE. 

perial  Bank  was  indicated  by  a  law  of  April  30,  1874,  which 
required  the  retirement  of  the  paper  money  issued  by  the 
various  states  not  later  than  July  i,  1875.  The  Imperial 
government,  in  order  to  promote  this  policy,  was  authorized 
to  issue  Treasury  bonds  to  the  amount  of  120,000,000  marks 
($30,000,000)  and  to  apportion  them  among  the  states  ac- 
cording to  population.  The  paper  money  in  circulation  was 
61,374,599  thalers  ($45,000,000),  and  it  was  not  distributed  in 
any  such  even  ratio  as  the  new  bonds.  The  law,  in  contem- 
plation of  this  situation,  authorized  the  Imperial  Treasury  to 
advance  to  states  which  needed  an  additional  allowance 
to  retire  their  paper  money  a  sum  in  Treasury  bonds  equal 
to  two-thirds  of  the  excess  of  notes  above  the  original  ap- 
portionment of  bonds.  These  bonds  were  to  be  receivable 
by  the  Imperial  Treasury  and  were  to  be  convertible  on 
demand  into  metallic  money.  The  advances  of  bonds  in 
addition  to  the  apportionment  of  120,000,000  marks,  were 
54,919,941  marks,  of  which  Saxony  received  19,013,441 
marks  ;  Bavaria,  14,534,975  marks  ;  Baden,  4,577,449 
marks;  Wurtemberg,  3,309,651  marks;  Hesse,  3,250,- 
514  marks  ;  and  the  other  states  less  than  2,000,000  marks 
each.  Prussia  received  no  additional  advance,  but  her  share 
of  the  original  allotment  was  72, 145,494  marks.  Oldenburg, 
Ivippe,  L,ubeck,  Bremen,  Hamburg,  and  Alsace- L,orraine 
received  no  extra  advance. 

The  sixteen  banks  which  decided  in  1875  to  accept  the 
federal  regulation  of  their  circulation  and  to  continue  to 
issue  notes  were,  besides  the  Imperial  Bank  and  the  Bank 
of  Brunswick,  the  Municipal  Bank  of  Breslau,  and  the 
banks  of  Magdeburg,  Dantzig,  the  Grand  Duchy  of  Posen, 
Hanover,  Frankfort,  Bavaria,  Saxony,  United  Deposits  at 
lyeipzig,  Chemnitz,  Wurtemberg,  Baden,  Southern  Ger- 
many, and  Bremen.  Provision  was  made  in  the  new  law 
for  a  new  bank  in  Bavaria,  with  which  two  existing  banks 
were  consolidated,  and  which  was  given  special  permission 
to  issue  circulating  notes  to  the  amount  of  70,000,000  marks. 
The  authorized  uncovered  circulation  of  these  sixteen  banks 
was  111,125,000  marks,  of  which  the  Bank  of  Bavaria  was 


THE  BANKS  OF  GERMANY. 


205 


originally  entitled  to  32,000,000  marks,  the  Bank  of  Saxony 
at  Dresden  to  16,771,000  marks,  the  banks  of  Frankfort, 
Baden,  Wurtemberg,  and  of  Southern  Germany  to  10,000,- 
ooo  marks  each,  and  the  others  to  smaller  amounts.  The 
absorption  of  the  issues  of  these  banks  by  the  Imperial  Bank 
has  proceeded  rapidly  in  recent  years.  Only  eight  banks  of 
circulation  remained  in  existence  in  Germany  at  the  close  of 
1891,  outside  the  Imperial  Bank.  They  included  the  larger 
of  the  banks  named  above,  and  their  aggregate  capital  was 
130,000,000  marks  ($32,000,000).  The  circulation  of  the 
local  banks  fell  from  200,300,000  marks  ($50,000,000)  in 
1883  to  192,400,000  marks  in  1890,  but  their  metallic  reserve 
increased  from  111,200,000  marks  to  112,600,000  marks.1 
The  number  of  banks  continuing  to  issue  circulation  at  the 
beginning  of  1896,  outside  the  Imperial  Bank,  was  seven, 
and  the  circulation  in  January  reached  a  total  of  180,880,000 
marks,  distributed  as  follows :  Frankfort  Bank  14,085,000 
marks;  Bavarian  Bank,  67,793,000  marks;  Saxon  Bank, 
50,438,000  marks;  Wurtemberg  Bank,  20,911,000  marks; 
Baden  Bank,  16,037,000  marks ;  Bank  of  Southern  Ger- 
many, 13,646,000  marks ;  Bank  of  Brunswick,  2,970,000 
marks. 

The  principal  items  in  the  accounts  of  the  Imperial  Bank 
since  its  creation  are  shown  in  the  following  table : 


YEAR. 

MEAN 
CIRCULATION. 

MEAN 
METALLIC 
RESERVE. 

MEAN 
DISCOUNTS. 

MEAN 
ADVANCES. 

MEAN 
CURRENT 
ACCOUNTS. 

1876 

684.8 

(In 
510.5 

millions  of  marks 

). 
50-9 

70.5 

1878 

622.6 

494.0 

340.8 

52.4 

109.9 

1880 

735-0 

562.0 

345-7 

5L3 

124.9 

1882 

747-0 

548.9 

372.1 

54-4 

III.Q 

1884 

732.9 

5QI-7 

377-7 

49.1 

155-2 

1885 

727.4 

586.1 

372.7 

52.4 

162.4 

1888 

933-0 

904.0 

430.0 

52.0 

247.0 

iSgO 

942.0 

Soi.o 

543-0 

98.0 

248.0 

iSgl 

971.0 

890.0 

546.0 

98.0 

360.0 

1892 

984.0 

962.0 

54i.o 

95-0 

463.0 

1893 

984.0 

824.0 

581.0 

85.0 

513.0 

1894 

1,000.0 

934.0 

548.0 

81.0 

491.0 

1895 

1,095.0 

1,011.0 

574-0 

83.2 

439-5 

1  Bulletin  de  Statistique,  Nov.,  1891,  xxx.,  542. 


206          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

The  proportion  of  the  metallic  reserve  which  is  in  gold  is 
not  regularly  reported,  but  was  stated  in  a  government  re- 
port of  May  10,  1892,  at  624,977,000  marks  ($150,000,000). 
The  amount  at  the  end  of  1894  was  714,448,000  marks  ($170,- 
000,000),  and  is  now  estimated  at  750,000,000  marks  ($180,- 
000,000).  The  circulation  of  specie  in  all  small  transactions 
in  Germany  is  ensured  by  the  limitation  of  the  minimum 
value  of  the  bank-note  to  one  hundred  marks  ($23.80).  The 
act  of  July  9,  1873,  required  all  the  German  banks  to  with- 
draw from  circulation  bills  below  this  value  as  well  as  those 
which  were  not  expressed  in  Imperial  marks.  Redemption 
in  coin  on  demand  is  required  at  the  Imperial  Bank  in  Ber- 
lin, but  may  be  refused  at  the  branches  when  the  funds  on 
hand  do  not  justify  it.  The  bank  is  obliged  to  receive  the 
bills  of  other  banks  of  issue  which  have  conformed  to  the 
law  of  March  24,  1875,  and  where  they  are  established  in 
cities  of  more  than  80,000  inhabitants.  Bank  bills  are  not  a 
legal  tender,  however,  between  individuals,  and  the  law  pre- 
scribes that  ' '  there  exists  no  obligation  to  accept  bank  bills 
for  payments  which  are  legally  due  in  specie,  and  no  such 
obligation  c&n  be  established  by  the  legislation  of  any  state 
with  regard  to  the  banks  of  the  state." 

The  government  took  advantage  of  the  extension  of  the 
charter  of  the  Imperial  Bank  in  1889  to  secure  a  larger  share 
in  the  dividends  than  it  had  before  demanded.  The  statute 
of  December  18,  1889,  reduced  from  four  and  a  half  to  three 
and  a  half  per  cent,  the  dividend  allotted  to  the  shareholders 
before  any  other  allotment.  Twenty  per  cent,  of  the  remain- 
ing profits  was  to  be  carried  to  a  reserve  fund,  so  long  as  this 
fund  was  less  than  a  quarter  of  the  capital,  and  the  remainder 
was  to  be  shared  equally  between  the  shareholders  and  the 
Imperial  Treasury  until  the  portion  of  the  shareholders 
reached  six  per  cent.  Of  the  profits  in  excess  of  six  per 
cent,  the  shareholders  obtain  only  a  quarter  and  the  Im- 
perial Treasury  the  other  three-quarters.  The  minimum 
dividend  of  three  and  a  half  per  cent,  was  to  be  made  up  to 
the  shareholders  from  the  reserve  funds  when  it  was  not 
provided  by  the  annual  profits  of  the  bank.  The  reserve 


THE  BANKS  OF  GERMANY.  2O/ 

fund  reached  the  legal  limit  of  one-fourth  of  the  capital  in 
1891.  The  old  law  divided  the  dividends  above  four  and  a 
half  per  cent,  equally  between  the  shareholders  and  the  gov- 
ernment up  to  eight  per  cent.  The  actual  profits  under  the 
old  law  from  1876  to  1888  were  131,900,000  marks,  amount- 
ing to  8.46  per  cent,  annually  on  the  capital.  The  share- 
holders received  94,900,000  marks,  amounting  to  6.08  per 
cent,  of  the  capital  and  the  state  received  24,700,000  marks. 
The  bank  had  at  the  beginning  of  1895  267  banking  offices 
and  1745  employees,  and  the  cost  of  administration  during 
1894  was  9,069,380  marks  ($2,250,000).  The  dividend  de- 
clared for  1894  was  6.26  per  cent,  to  the  7877  shareholders 
and  more  than  half  as  much  to  the  government. 

The  Imperial  Bank  has  done  much  of  late  years  to  assist 
the  cultivators  and  small  tradesmen,  but  not  all  that  the 
German  socialists  desire.  The  president  recently  had  occa- 
sion to  remind  them  that  the  bank  was  not  in  a  position  to 
accord  long  credits  and  that  this  condition  was  expressed  in 
the  fundamental  law,  forbidding  the  discount  of  paper  for 
more  than  four  months.  "Within  the  limits  of  its  stat- 
utes," said  he  "  the  bank  accords  to  small  but  sound  cus- 
tomers a  suitable  credit,  when  and  so  far  as  their  conduct 
and  fortune  offer  guarantees  of  the  punctual  fulfilment  of 
their  engagements.  Artisans  and  merchants  less  fortunate 
are  always  able  to  unite  with  advantage  in  a  credit  associa- 
tion."1 This  suggestion  has  long  since  been  acted  on  in 
Germany  through  the  Schulze-Delitzsch  associations.  These 
are  co-operative  popular  banks  whose  members  comprise  the 
smallest  artisans,  domestics,  and  shop-keepers.  They  form, 
says  Professor  Jannet, "  a  hierarchy  of  banks  which  by  the  suc- 
cessive rediscount  of  their  paper  cause  the  bills  of  exchange 
of  the  most  modest  artisans  to  reach  the  Imperial  Bank."2 


1  Raffalovich,  Marchk  Financier  en  1894-3,  IT6. 

2  Le  Capital,  la  Speculation  et  la  Finance,  563.     Mr.  Henry  F. 
Merritt,  the  efficient  United  States  Consul  at  Barmen,  indicates  that 
the  Imperial  Bank  even  makes  loans  to  associations  not  doing  a 
strictly  short  term  business,  but  states  that  at  the  general  meeting 
of  the  Neuwieder  Centralskasse  at  Mainzon  on  June  20,  1894,  com- 


208          HISTORY  OF  MODERN  BANKS   OF  ISSUE. 

President  Koch  stated  at  the  annual  meeting  in  1895  that 
54,641  persons  or  firms  were  admitted  to  discount  at  the  bank 
during  1894,  of  whom  6414  were  agriculturalists.  From 
April  i,  1893,  to  April  i,  1894,  the  bank  had  purchased  216,- 
000,000  marks  of  bills  bearing  agricultural  signatures,  be- 
sides discounting  directly  24,000,000  marks  more.  The 
associations  having  connections  with  the  bank,  he  declared, 
contained  502,451  members,  of  whom  127,229  belonged  to 
the  rural  associations,  and  they  had  at  their  disposal  60,000,- 
ooo  marks  of  the  funds  of  the  bank. 


plaints  were  made  that  the  Imperial  Bank  would  only  advance  them 
money  at  five  and  a  half  per  cent. — U.  S.  Consular  Reports,  Decem- 
ber, 1895,  18. 


CHAPTER    IX. 

THE    AUSTRO-HUNGARIAN    BANK. 

The  Evils  of  a  Century  of  Paper  Money — The  First  Issues  of  Notes 
and  the  Efforts  to  Restore  Coin  Redemption — The  Creation  of 
the  Imperial  Bank  and  the  Successive  Changes  in  its  Charter — 
Establishment  and  Growth  of  the  Hungarian  Branch — The  Mone- 
tary Reform  of  1892  and  the  New  Rate  of  Exchange — Use  of 
Certificates  of  Deposit. 

THE  Austrian  Empire  has  been  for  a  century  under  the 
dominion  of  paper  money,  but  her  monetary  history 
has  differed  from  that  of  France  with  the  assignats 
and  the  United  States  with  the  Continental  money  of  the 
Revolution.  The  Austrian  paper  money  has  been  a  serious 
detriment  to  the  commercial  development  of  the  country  and 
the  solidity  of  business  enterprises,  but  the  volume  has 
never  reached  the  point  of  absolute  worthlessness  and  re- 
pudiation. The  effect  of  the  system  has  been,  in  the  lan- 
guage of  Professor  Sumner,1  "not  like  an  acute  disease  ;  it 
is  like  an  invalid  state  with  occasional  fever."  The  first 
issues  of  paper  money  seem  to  have  had  the  same  beneficial 
effects  as  the  issues  of  Law's  bank  in  France  and  the  issues 
of  £i  bank-notes  in  Scotland,  in  stimulating  business  en- 
terprises and  affording  a  convenient  circulating  medium 
where  none  existed,  but  the  limit  was  soon  over-passed  and 
the  Austrian  paper  money  began  its  downward  course.  This 
course  has  been  several  times  arrested  by  earnest  efforts  on 
the  part  of  the  government,  only  to  be  resumed  when  the 
necessities  of  war  compelled  new  issues  of  paper.  The  fi- 

1  History  of  American  Currency,  p.  323. 
14  209 


210          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

nancial  history  of  the  Austrian  Empire  has  been  a  succes- 
sion of  acts  for  refunding,  for  new  issues  of  interest-bearing 
and  non-interest  bearing  securities,  and  new  regulations  for 
the  Austrian  National  Bank  until  the  recital  becomes  almost 
tedious.  The  government  and  the  bank  have  been  able  in 
recent  years  to  accumulate  a  large  stock  of  gold,  the  paper 
money  has  risen  much  above  the  value  of  standard  silver 
coins,  and  unless  the  country  is  dragged  into  some  new  war 
she  will  soon  accomplish  the  resumption  of  specie  payments 
upon  a  gold  basis. 

The  first  important  banking  institution  in  Austria  seems 
to  have  been  created  at  Vienna  by  a  decree  of  June  16,  1703, 
with  a  capital  of  7,000,000  florins  ($3,500,000).  It  was 
created  for  the  purpose  of  rescuing  the  government  from  the 
evils  of  a  debased  currency  which  even  then  existed,  but 
was  authorized  to  receive  the  deposits  of  individuals,  like 
the  similar  establishments  of  Venice,  Hamburg,  and  Amster- 
dam. It  was  essentially  a  governmental  institution  and  was 
formed,  like  the  Bank  of  Venice,  for  the  funding  of  the  pub- 
lic debt,  which  was  to  be  accomplished  by  an  annual  levy 
upon  the  receipts  of  the  Treasury  for  the  security  and  retire- 
ment of  the  mandates  or  assegni  which  the  new  establish- 
ment was  authorized  to  issue.1  The  experiment  was  not 
successful.  The  government  was  unable  in  the  involved 
state  of  the  finances  to  make  the  annual  payments  to  which 
it  was  pledged  and  the  mandates  issued  by  the  bank  were 
received  very  reluctantly  into  the  monetary  circulation.  The 
government  finally  turned  the  institution  over  to  the  City  of 
Vienna  and  it  took  the  name  of  the  Bank  of  the  City  of 
Vienna.  The  transformation  did  not  save  it.  The  bank 
suspended  operations  in  drafts  on  private  account  in  order  to 
devote  its  entire  resources  to  refunding,  but  the  expected 
means  for  this  work  failed  and  the  bank  went  into  liquida- 
tion at  the  expense  of  its  depositors  and  shareholders.  No 
further  attempt  was  made  to  establish  a  national  bank  for 
over  a  century. 


1  Noel,  I.,  344. 


THE   AUSTIN-HUNGARIAN  BANK.  211 

The  Austrian  Kmpire  found  itself  in  1761  in  one  of  the 
most  critical  stages  of  its  history.  The  headship  of  Ger- 
many, which  descended  to  the  Hapsburgs  from  Charle- 
magne, was  escaping  from  Austrian  control  under  the  potent 
influence  of  Frederick  the  Great  of  Prussia,  and  Austrian 
finances  were  involved  in  an  inextricable  confusion  in  which 
the  one  patent  fact  of  a  deficit  was  all  that  was  not  obscure. 
The  Count  of  SinzendorfF,  one  of  the  leading  ministers  of  the 
Empire,  noticed  that  the  condition  under  which  loans  were 
contracted  afforded  no  opportunity  to  small  capitalists  to  in- 
vest. He  presented,  therefore,  a  project  by  which  bills  of 
from  20  to  100  florins  were  issued,  with  coupons  attached 
indicating  the  value  from  day  to  day,  with  interest  added  at 
six  per  cent.  Public  depositories  were  authorized  to  receive 
these  bills  in  payment  of  taxes  and  to  disburse  them  to  the 
creditors  of  the  State  at  their  value  at  the  date  of  payment, 
including  accrued  interest.  M.  Noel  says  regarding  the 
effects  of  this  issue  : 

The  public  were  not  slow  to  receive  these  bills  with  favor  and  the 
circulation  attained  immediately  such  proportions  that  the  govern- 
ment felt  able  to  dispense  with  the  provision  for  interest,  which 
created  a  heavy  charge  upon  the  Treasury.  It  decided  to  substitute, 
by  a  system  of  exchanges  from  day  to  day,  paper  money  without  in- 
terest for  the  original  interest-bearing  bills,  which  represented  a  par- 
ticular kind  of  Treasury  bonds  ;  and  in  redeeming  the  last,  in  order 
to  avoid  confusion,  it  issued  notes  of  five,  ten,  twenty-five,  fifty,  and 
one  hundred  florins.  Public  opinion  showed  itself  as  favorable  to  the 
employment  of  the  new  money  as  to  the  circulation  of  the  first,  and 
the  numerous  facilities  which  it  gave  to  daily  transactions  gave  it  a 
preference  even  over  metallic  money.1 

The  government  could  not  content  themselves  with  tbe 
moderate  use  of  the  power  in  their  hands.  A  second  issue 
of  notes  was  decreed  in  1769  and  a  third  in  1771.  Commerce 
was  expanding,  aided  to  some  extent  by  the  convenience  of 
the  new  note  issues,  and  the  government  seized  the  oppor- 
tunity for  injecting  fresh  masses  of  paper  into  the  circulation. 
These  excessive  issues  provoked  a  panic  in  1797,  which 

1  Banques  d' Emission  en  Europe,  I.,  340. 


212          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

obliged  the  government  to  give  forced  legal  tender  character 
to  the  paper  and  even  to  refuse  its  conversion  into  securities 
of  the  consolidated  debt.  Specie  rose  to  a  premium  of  thir- 
teen per  cent,  in  December,  1799,  and  began  to  disappear 
from  circulation,  and  in  1800  the  Treasury  attempted  to  fill 
its  place  by  the  creation  of  notes  of  one  and  two  florins  (fifty 
cents  and  one  dollar).  Austria  lost  several  Italian  provinces 
as  the  result  of  the  brilliant  campaigns  of  Napoleon,  and  the 
inhabitants  of  those  provinces  who  held  Treasury  bills  over- 
ran the  public  depositories  with  the  demand  for  payment  in 
specie.  The  separation  between  coin  and  paper  constantly 
grew  wider,  until  in  1806  paper  circulated  for  only  half  its 
value  in  silver,  which  was  then  the  metallic  standard.  The 
Treasury  made  repeated  promises,  which  could  not  be  kept, 
that  a  part  of  the  annual  tax  levy  should  be  consecrated  to 
the  reduction  of  the  paper  circulation.  The  need  for  funds 
was  so  urgent  that  decrees  were  issued  ordering  the  trans- 
mission to  the  Treasury  of  silver  vessels,  jewelry,  the  deco- 
rations of  the  churches  and  the  consecrated  fonts  throughout 
the  empire,  which  were  paid  for  in  paper  money  at  three 
times  their  specie  value. 

The  peace  which  followed  the  French  victory  at  Wagram 
in  1809  and  the  marriage  of  the  Archduchess  Maria  Louisa 
with  Napoleon  afforded  an  opportunity,  which  the  govern- 
ment embraced,  to  attempt  the  restoration  of  order  in  the 
public  finances.  Delegates  from  all  the  provinces  were 
assembled,  but  they  found  almost  insuperable  difficulties  in 
the  inefficiency  and  corruption  of  public  officials  and  the  ab- 
solute lack  of  confidence  by  the  business  community  and  the 
people  in  the  oft-broken  pledges  of  the  government.  The 
issues  of  government  paper  money  had  steadily  increased 
from  74,200,000  florins  ($37,000,000)  in  1797  to  1,064,000,000 
florins  ($530,000,000)  in  1811.  The  value  of  the  paper  had 
declined  almost  in  proportion  to  the  increase  in  the  issues. 
The  price  of  silver  expressed  in  paper  was  118  in  December, 
1800.  It  steadily  rose  to  203  in  1807,  leaped  to  500  in  De- 
cember, 1 8 10,  with  the  enormously  increased  issues  of  the 
three  intervening  years,  and  touched  1200  for  a  time  in  1811. 


THE  AUSTRO-HUNGAKIAN  BANK. 

The  method  adopted  in  France,  when  the  territorial  man- 
dates were  substituted  for  the  assignats,  was  followed  by 
Austria,  which  declared  the  reduction  of  existing  issues  to 
one-fifth  of  their  original  value  and  substituted  redemption 
notes  (EinloSungsscheine),  which  were  called  Viennese 
money.  The  decree  of  February  20,  1811,  which  put  this 
reduction  in  force,  wras  issued  with  the  avowed  purpose  of 
arresting  the  fluctuations  in  the  paper  money,  which  were 
declared  to  be  "so  extremely  pernicious,  because  they 
shatter  private  fortunes,  fetter  industry,  derange  all  social 
relations,  and  give  birth  to  distrust  and  jealousy."  '  The 
decree  was  despatched  under  seal  to  the  officials  in  different 
parts  of  the  Empire,  to  be  opened  at  five  o'clock  in  the  morn- 
ing on  March  15,  1811,  and  the  announcement  was  awaited 
by  eager  crowds  who  looked  to  the  action  of  the  Emperor  to 
relieve  the  public  distress.  The  majority,  who  held  quan- 
tities of  the  paper,  wrent  away  cursing  the  government  for 
the  decree.  A  few,  who  were  believed  to  have  had  previous 
notice  of  its  contents,  had  put  their  affairs  in  a  shape  which 
left  them  rich,  as  some  of  the  purchasers  of  stock  in  the 
Mississippi  Company  of  John  Law  had  transformed  it  into 
real  estate  or  exported  the  proceeds  in  coin  while  the  stock 
was  still  selling  at  high  figures.  The  government  promised 
to  limit  the  new  issues  of  redemption  paper  to  just  enough 
to  redeem  the  outstanding  notes  in  the  proposed  ratio  of  one 
to  five,  which  would  be  about  212,000,000  florins.  The  new 
notes  were  depreciated,  however,  from  the  first  day  of  their 
issue  and  fell  to  fifty  per  cent,  during  the  year,  but  rose  to 
eighty-seven  per  cent,  when  the  public  began  to  believe  that 
the  quantity  would  not  be  increased.  The  suspension  of 
new  issues  was  only  for  a  brief  period  and  the  necessities  of 
the  last  Napoleonic  wars  forced  the  issues  up  to  638,900,000 
florins  ($319,000,000)  in  1816. 

The  distrust  and  business  paratysis  caused  by  these  re- 
peated paper  issues  and  the  necessity  of  raising  money  to 
carry  on  the  government  led  to  the  creation  of  the  National 


Leroy-Beaulieu,  II.,  644. 


214         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

Bank  of  Austria.  The  Btnperor,  in  issuing  the  imperial 
patent  for  the  establishment  of  the  bank,  invoked  the  public 
confidence  b)'  declaring  that  he  had  from  the  first  desired 
to  re-establish  order  in  the  standard  of  value,  but  that  the 
violent  shocks  which  had  rent  Europe  asunder  had  involved 
Austria  in  a  series  of  difficult  wars,  in  which  the  preservation 
and  the  independence  of  the  monarchy  became  dearer  than 
mere  questions  of  finance.  He  pledged  himself  to  the  people 
that  no  new  paper  money  should  be  put  in  circulation  and  that 
the  withdrawal  of  that  already  out  should  be  confided  to  a 
national  privileged  establishment.1 

A  party  of  capitalists  was  formed  after  some  delay  and  the 
statutes  of  the  National  Bank  of  Austria  received  the  Impe- 
rial approval  on  July  15,  1817.  The  bank  was  accorded  for 
twenty-five  years  the  exclusive  privilege  of  note  issues,  was 
exempted  from  the  stamp  taxes,  and  was  authorized  to  accept 
deposits  and  discount  commercial  paper.  The  entire  capital 
was  to  be  110,000,000  florins  ($55,000,000)  in  shares  of  noo 
florins  each,  payable  100  florins  in  silver  and  1000  florins  in 
paper.  The  bank  was  able  to  dispose  of  only  50,621  shares, 
from  which  the  proceeds  were  $2,600,000  in  silver  coin  and 
$29,000,000  in  paper.  The  government  took  up  and  de- 
stroyed the  paper  and  issued  an  equal  amount  of  securities 
bearing  interest  at  the  rate  of  two  and  a  half  per  cent.  As 
the  notes  were  depreciated  to  one-third  of  their  nominal 
value,  this  amounted  to  seven  and  a  half  per  cent,  upon  the 
real  capital  realized,  which  was  about  $12,300,000  ($2,600,- 
ooo  in  coin  and  $9,700,000  in  the  coin  value  of  the  paper). 
The  services  of  the  bank  in  restoring  confidence  and  busi- 
ness activity  were  further  compensated  by  permission  to 
issue  a  quantity  of  notes  which  the  government  pledged 
itself  to  accept  as  cash  without  the  privilege,  which  was 
accorded  to  individuals,  of  demanding  redemption  in  coin. 
The  government  showed  its  good  faith  by  devoting  to  the 
retirement  of  the  paper  money  a  part  of  the  war  contribution 
paid  by  France,  and  131,829,887  florins  were  soon  withdrawn 


1  Noel,  I.,  345-46. 


THE  A  USTRO-HUNGARIAN  BANK.  21$ 

from  circulation,  reducing  the  amount  outstanding  to  546,- 
886.38  florins  ($273,000,000).  The  bank  continued  the 
process  of  converting  the  government  money  into  bank-notes 
until  on  December  31,  1847,  the  amount  outstanding  was 
reduced  to  9,712,838  florins  ($4,850,000). 

The  uprising  in  Hungary  in  1848,  the  Crimean  War,  and 
the  Italian  struggle  which  resulted  in  Austrian  defeat  at 
Magenta  and  Solferino,  imposed  new  charges  upon  the  Aus- 
trian government  and  did  much  to  upset  the  work  of  the 
bank  during  the  thirty  years  of  peace  from  1816  to  1846. 
The  bank  had  proceeded  so  rapidly  with  the  conversion  of 
the  government  paper  money  as  to  endanger  its  own  security 
and  alarming  runs  were  threatened  in  1831,  and  again  in 
1840,  which  were  only  averted  by  the  help  of  the  government 
and  in  the  latter  case  by  a  loan  of  coin  from  the  private 
banks  of  Vienna.  The  charter  of  the  bank  expired  in  1842, 
but  the  Emperor  signed  a  patent  renewing  its  privileges, 
with  some  modifications,  until  December  31,  1866.  The 
bank  had  enjoyed  until  this  time  the  exclusive  privilege  of 
discount  as  well  as  the  monopoly  of  note  issues,  but  the 
former  privilege  was  now  thrown  open  to  others  and  the 
power  to  make  loans  upon  real  estate  mortgages  was  with- 
drawn. The  bank  had  contributed  somewhat  to  the  expan- 
sion of  commerce  by  its  discounts,  but  its  immense  advances 
to  the  government  prevented  its  applying  so  much  capital  as 
was  needed  for  the  development  of  new  private  enterprises. 
Financial  societies  and  private  banks  of  discount  had  sprung 
up  in  the  important  centres  and  their  success  and  legality 
depended  upon  sharing  with  the  National  Bank  the  power  to 
make  discounts  and  advances. 

The  bank  at  the  end  of  the  year  1847  possessed  a  metallic 
reserve  of  70,240,000  florins  ($35,000,000)  and  maintained  a 
circulation  of  213,000,000  florins.  The  outbreak  of  the  revo- 
lution in  Hungary  brought  the  bill-holders  in  crowds  to  the 
bank  for  the  redemption  of  the  notes  and  the  coin  reserve 
shrunk  in  a  few  days  to  35,023,030  florins.  The  directors 
were  seized  with  panic  and  secured  from  the  government  the 
decree  of  June  20,  1848,  authorizing  the  bank  to  suspend 


2l6  HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

specie  payments  and  giving  forced  legal  tender  character  to 
its  notes.  The  government  hesitated  to  take  this  desperate 
step  and  accompanied  it  with  decrees  intended  to  prevent 
the  export  of  gold  and  silver,  even  to  the  amount  of  more 
than  100  florins  ($50)  in  the  pockets  of  tourists.  The  gov- 
ernment at  the  same  time  resumed  the  issue  of  its  own  paper 
promises  in  the  form  of  interest-bearing  mandates,  redeem- 
able in  four,  eight,  and  twelve  months.  The  fifth  of  these 
issues,  in  1849,  was  given  forced  legal  tender  character  and 
the  notes  were  no  longer  to  be  redeemed  in  coin.  Gold  and 
silver  began  to  disappear  from  circulation,  pieces  of  six  and 
ten  kreutzers  (one  to  two  cents)  were  coined  only  to  disap- 
pear, and  bank  bills  of  one  florin  and  Treasury  bills  of  six 
and  ten  kreutzers  were  issued  to  take  the  place  of  the  small- 
est coins.  The  credit  of  the  bank  began  to  sink  with  that 
of  the  government  and  the  depreciation  of  the  bills  in  the 
middle  of  1849  to  about  half  their  nominal  value  alarmed 
the  administration  and  led  to  a  solemn  declaration  that  no 
more  loans  should  be  demanded  from  the  bank  and  that  the 
existing  debt  should  be  adjusted  and  consolidated. 

The  history  of  the  thirteen  years  from  1848  to  1861  is  the 
history  of  the  disregard  of  this  pledge  and  of  repeated  loans 
negotiated  through  the  bank  in  spite  of  continual  efforts  to 
refund  the  debt  and  reduce  its  proportions.  The  aggregate 
of  funded  and  floating  debts  due  the  bank  by  the  govern- 
ment was  178,500,000  florins  on  January  i,  1849,  and  205,- 
300,000  florins  on  January  i,  1850.  Considerable  reductions 
were  made  during  the  next  four  years  and  the  figures  were 
carried  down  to  121,700.000  florins  on  January  i,  1854.  The 
provisions  for  the  Crimean  War  forced  the  figures  up  again 
with  a  bound  to  294,200,000  florins  ($147,000,000)  on  Janu- 
ary i,  1855.  The  reduction  of  the  debt  began  again  the 
next  year  and  continued  until  it  was  reduced  on  January  i, 
1859,  to  145,700,000  florins,  but  the  war  with  the  Italian 
States  and  France  carried  the 'amount  up  again  to  285,800,- 
ooo  florins.1  M.  Paul  lyeroy-Beaulieu,  after  reviewing  the 


Leroy-Beaulieu,  II.,  646. 


THE  AUSTRO-HUNGAR1AN  BANK.  2  I/ 

long  series  of  negotiations  between  the  government  and  the 
bank,  sums  up  the  lesson  of  these  years  as  follows  : 

It  is  apparent  how  political  events  hurled  the  state  farther  and  far- 
ther down  the  path  of  forced  legal  tender  at  the  moment  when  the 
resumption  of  specie  payments  seemed  at  hand.  It  is  apparent  also 
of  what  little  use  were  pledges,  whether  of  realty  or  securities,  to 
hasten  the  liberation  of  the  state  and  to  permit  the  bank  to  terminate 
the  suspension  of  specie  payments.  It  is  because  all  such  pledges  are 
incapable  of  negotiation  at  short  notice  without  great  loss.  It  is  ap- 
parent also  what  singularly  advantageous  conditions  the  bank  ob- 
tained from  the  state  for  its  advances.  It  enjoyed  an  interest  of  two 
or  three  per  cent,  on  sums  in  paper  which  cost  it  nothing.1  This 
situation  was  too  favorable  for  the  bank  for  it  to  show  itself  rigorous 
towards  the  state.  Every  exhibition  of  complaisance  which  it  made 
was  the  source  of  abundant  revenue.  This  rate  of  two  or  three  per 
cent,  was  extravagant.  In  France  one  per  cent,  was  adopted  and  in 
Italy  six-tenths  of  one  per  cent.  The  transformation,  for  such  a  long 
period  of  time,  of  a  great  establishment  of  credit  into  the  official 
lender  of  the  state  had  the  disastrous  consequence  that  this  establish- 
ment could  with  difficulty  fulfil  its  natural  mission  of  lending  to  com- 
merce. One  cannot  serve  two  masters,  and  a  bank  which  always  has 
its  hand  in  its  coffers  to  make  advances  to  the  state  is  compelled  to 
show  itself  more  stringent  towards  manufacturers  and  merchants. 

The  attempt  to  resume  specie  payments  seemed  upon  the 
eve  of  success  in  1859.  A  monetary  convention  was  con- 
cluded January  24,  1857,  with  the  view  to  securing  a  uniform 
currency  throughout  Germany,  by  which  the  contracting 
parties,  of  which  Austria  was  one,  were  to  issue  no  more 
legal  tender  paper  after  January  i,  1859,  which  was  not  re- 
deemable in  coin  on  demand.  An  Imperial  ordinance  of 
April  30,  1858,  prepared  the  way  for  resumptiofi  by  provid- 
ing that  after  November  ist  of  the  same  year  one- third  of 

1  M.  Noel  seems  to  ignore  this  element  of  the  bank  loans  and  says  : 
"  The  bank,  during  the  entire  period  which  elapsed  from  its  origin  to 
1861,  had  risen  to  the  level  of  its  heavy  task.  It  had  contributed  en- 
ergetically to  sustain  the  government  in  the  difficult  situations  which 
it  had  traversed  and  its  support,  often  disinterested,  had  merited  gen- 
eral confidence.  Far  from  abusing  the  opportunity  of  the  multiplied 
crises  which  had  obliged  the  Imperial  Treasuty  to  appeal  to  it,  it  had 
endeavored  to  lighten  the  burden  of  the  sacrifices  imposed  by  events 
upon  the  country." — Banques  d1  Emission  en  Europe,  I.,  364. 


218          HISTORY  OF  MODERN  BANKS   OF  ISSUE. 

the  new  bills  should  be  covered  by  coin  or  bullion  and  that 
the  other  two-thirds  should  be  represented  in  the  assets  of 
the  bank  by  securities  or  commercial  paper.  An  arrange- 
ment was  also  concluded  between  the  government  and  the 
bank  for  the  retirement  of  100,000,000  florins  in  small  notes 
by  the  pledge  of  the  domains  of  the  State.  War  with  Italy 
upset  these  carefully  laid  plans  and  on  April  29,  1859,  the 
bank  was  again  released  from  the  obligation  of  coin  redemp- 
tion, and  the  government  appealed  to  it  for  a  loan  of  200,- 
000,000  florins.  This  was  met,  to  two-thirds  of  its  face 
value,  by  the  issue  of  bank-notes  entirely  in  denominations 
of  five  florins  ($2.50).  The  public  had  no  use  for  so  many 
small  bills  and  they  rapidly  returned  to  the  bank.  The  loan 
with  which  it  was  sought  to  pay  this  advance  by  the  bank 
proved  a  failure  and  the  government  was  compelled  to  deliver 
a  variety  of  securities  in  addition  to  the  unplaced  obligations 
of  the  loan,  with  a  condition  that  they  should  not  be  marketed 
before  November  i,  1861.* 

The  management  of  the  bank  decided  on  May  9,  1853,  to 
issue  the  49,379  shares  which  had  remained  undisposed  of 
since  1820  and  they  gave  the  preference  to  the  holders  of  the 
original  shares,  at  the  rate  of  800  florins  payable  in  bank 
bills,  which  were  then  below  par.  The  bank  was  again  au- 
thorized by  a  decree  of  October  21,  1855,  to  loan  money  on 
mortgages  and  issue  mortgage  bonds.  This  branch  of  busi- 
ness rapidly  developed  and  on  December  31,  1858,  already 
employed  about  37,000,000  florins  ($18,500,000).  The  capi- 
tal of  the  bank  was  again  doubled  and  immediately  after- 
wards increased  by  50,000  new  shares  issued  at  the  rate  of 
about  725  florins,  which  made  the  total  capital  on  December 
31,  1855,  about  110,250,000  florins  ($55,000,000).  A  law  of 
November  13,  1868,  reduced  the  capital  again  to  90,000,000 
florins  ($45,000,000). 

The  approach  of  the  termination  of  the  privileges  of  the 
bank  led  to  an  earnest  discussion,  which  resulted  in  the  law 
of  December  27,  1862,  remodelling  the  charter  of  the  insti- 


Leroy-Beaulieu,  II.,  650. 


THE  AUSTRO-HUNGARIAN  BANK. 


2I9 


tion  and  its  relations  with  the  government.  The  govern- 
ment proposed  the  renewal  of  the  charter  until  1890  ;  the 
finance  committee  of  the  elective  chamber  proposed  1880. 
The  subject  was  referred  to  a  mixed  committee  of  both  cham- 
bers, which  finally  fixed  the  limit  at  December  31,  1876. 
The  privileges  of  the  bank  were  broadened  from  time  to 
time  until  1877,  when  the  law  of  December  2oth,  terminating 
the  commercial  treaties,  provided  also  that  the  ministry 
should  conclude  an  arrangement  with  the  bank  extending  its 
privileges  until  March  29,  1878.  A  subsequent  act  made 
the  limit  May  31,  1878,  and  one  month  later  the  National 
Bank  of  Austria  was  fused  with  the  Austro-Hungarian 
Bank. 

The  National  Bank,  during  its  later  years,  in  spite  of  the 
manner  in  which  it  was  fettered  by  its  relations  to  the  gov- 
ernment and  the  suspension  of  specie  payments,  conducted 
its  relations  with  the  business  community  in  such  a  way  as 
to  contribute  in  a  considerable  measure  to  the  expansion  of 
industry.  The  business  paper  carried  increased  from  about 
32,000,000  florins  ($16,000,000)  in  1848  to  75.000,000  florins 
in  1854  and  90,000,000  florins  ($45,000,000)  in  1855.  The 
advances  on  public  securities  increased  from  about  15,000,- 
ooo  florins  in  1848  to  50,000,000  florins  in  1854  and  82,000,- 
ooo  florins  in  1855.  The  discounts  increased  nearly  forty  per 
cent,  from  1865  to  1877  and  would  probably  have  reached  a 
larger  figure  but  for  the  liquidations  following  the  crisis  of 
1873.  The  following  table  shows,  in  florins,  the  aggregate 
amount  of  the  commercial  paper  discounted  every  alternate 
year  from  1865  to  1877  : 


YEAR. 

AT  VIENNA. 

AT  AUSTRIAN 
BRANCHES. 

AT  HUNGARIAN 
BRANCHES. 

TOTAL. 

1865 
1867 
1869 
1871 

1873 
1875 
1877 

383,648,611 

183,330,404 
232,424,629 
331,436,438 
468,286,132 
310,430,552 
298,706,477 

63,924,852 
76,028,931 
125,830,418 

173,573,951 
24O,OO7,674 
221,522,518 
212,324,840 

23,563,202 
37,340,086 
103,590,858 
134,386,521 
168,973,050 
147,671,119 
135,296,195 

471,136,665 
296,699,422 
461,845,906 

639.39MU 
877,266,856 
679,624,190 
646  327,512 

220          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

The  provisions  for  regulating  the  note  issues  which  were 
adopted  in  1863  bear  the  traces  of  the  English  legislation  of 
1844.  They  provided  for  an  "uncovered"  circulation  of 
200,000,000  florins  ($  100,000,000)  and  that  all  notes  issued 
beyond  that  sum  should  be  covered  by  gold  or  silver  coin  or 
bullion.  The  uncovered  circulation  was  required  to  be  pro- 
tected by  commercial  paper,  by  securities  deposited  for 
advances,  by  the  coupons  of  mortgages  matured  and  payable 
or  by  mortgage  bonds  of  the  bank.  This  last  form  of  secu- 
rities was  not  allowed  to  exceed  20,000,000  florins  and  they 
were  accepted  for  only  two-thirds  of  their  nominal  value. 
Gold  coin  or  bullion  was  at  that  time  allowed  to  take  the 
place  of  silver  to  the  extent  of  only  a  quarter  of  the  metallic 
reserve.  A  decree  of  October  30,  1868,  authorized  the  bank 
to  count  as  security  for  the  uncovered  circulation  bills  of 
exchange  drawn  upon  foreign  places,  and  a  law  of  March 
1 8,  1872,  gave  the  bank  discretion  as  to  the  proportion  of 
gold  and  silver  to  be  kept  in  its  reserves. 

The  attempt  to  tie  the  note  circulation  rigidly  to  deposits 
of  specie  broke  down  as  completely  in  Austria  as  it  has 
broken  down  in  England  every  time  that  a  crisis  has  oc- 
curred. The  first  suspension  of  the  limit  was  authorized  by 
the  government  for  a  brief  period  in  1866.  The  bank  was 
compelled  again  in  1869  to  suspend  advances  upon  private 
deposits  of  bullion  and  did  not  resume  this  branch  of  its 
business  for  two  years,  in  spite  of  the  protests  of  manufac- 
turers and  brokers.  The  bank  pursued  a  very  conservative 
course  while  the  fever  of  speculation  was  upon  the  country, 
but  was  unable  to  come  to  the  rescue  of  mercantile  credit 
when  the  crisis  of  1873  broke  out,  because  of  the  limitations 
upon  its  circulation.  The  condition  of  credit  became  so 
critical  that  the  government  was  obliged  to  intervene  in 
almost  precisely  the  same  manner  as  in  England.  A  letter 
was  addressed  to  the  bank  by  the  Minister  of  Finance  on  May 
J3>  I^73,  revoking  the  provisions  of  Article  14  of  the  statutes 
of  the  bank,  relative  to  the  metallic  security  for  bank-notes, 
and  an  ordinance  to  the  same  effect  was  approved  by  the 
Diet.  The  ordinance  gave  the  bank  authority  to  issue  notes 


THE  AUSTRO-HUNGARIAN  BANK.  221 

by  discounting  bills  of  exchange  and  making  advances  on 
public  securities  without  any  other  limitation  than  its  own 
good  judgment.  Under  this  authority  the  bank  granted 
extraordinary  credits  to  the  amount  of  64,451,000  florins  in 
Austria,  and  30,119,000  florins  in  Hungary.  The  circula- 
tion exceeded  the  legal  limit  several  times  in  May  and  July 
and  was  almost  continuously  above  the  limit  during  October, 
November,  and  December,  1873.  The  effect  of  the  action 
of  the  bank  was  almost  instantaneous  in  restoring  credit. 
"  The  first  moment  of  panic  passed,"  says  M.  Clement  Jug- 
lar,  "  it  was  seen  that  commerce  and  industry  continued  to 
make  good  head  and  that  the  vital  forces  of  the  country 
were  not  exhausted,  the  crisis  having  been  specially  severe 
in  everything  affecting  the  bank."  1 

Payment  in  coin  on  demand  was  nominally  the  condition 
upon  which  the  bank  held  its  privileges,  but  the  situation 
of  the  government  and  its  relations  with  the  bank  were  such 
that  it  was  thought  necessary  to  maintain  forced  legal  tender 
for  an  indefinite  period.  A  convention  was  signed  between 
the  bank  and  the  government  on  January  3,  1863,  providing 
for  the  resumption  of  specie  payments  by  the  bank  during 
1867,  but  the  war  with  Prussia  postponed  the  event  and  the 
country  continued  to  stagger  through  the  mire  of  irredeem- 
able paper.  An  act  of  May  5,  1866,  authorized  the  gov- 
ernment to  issue  150,000,000  florins  in  government  bills, 
including  notes  of  one  and  five  florins  which  had  already 
been  issued  by  the  bank  and  which  were  now  declared  to  be 
bills  of  state.  The  disasters  of  Sadowa  and  the  other  events 
of  the  war  drove  the  government  to  the  old  device  of  John 
Law  and  the  French  revolutionists,  to  guarantee  a  part  of 
its  paper  issues  by  the  salt  mines  of  Gmund,  Hallein,  and 
Aussee,  at  the  same  time  that  the  pledge  was  given  that  the 
maximum  of  the  two  forms  of  the  floating  debt — the  paper 
money  and  the  salt  notes  (Salinenscheine) — should  not  ex- 
ceed 400,000,000  florins.  This  pledge  was  not  kept  to  the 
letter,  but  the  actual  circulation  was  never  greatly  above  the 


1  Des  Crises  Commerciales,  496. 


222          HISTORY  OF  MODERN  BANKS   OF  ISSUE. 

legal  maximum.  The  mean  circulation  of  the  old  paper 
money  in  1876  was  343,029,232  florins  and  of  the  salt  notes 
68>97°>395  florins. 

An  effort  was  made  in  1867  to  bring  Austria  within  the 
circle  of  the  Latin  Union  and  to  harmonize  her  monetary 
system  with  that  of  France,  Italy,  Belgium,  and  Switzer- 
land. The  government  consented  to  the  coinage  of  pieces 
of  eight  and  four  florins  in  gold,  equivalent  to  pieces  of 
twenty  and  ten  francs  ($4  and  $2).  The  Franco-German  war 
arrested  the  negotiations  before  they  had  been  ratified,  but 
the  Imperial  government  immediately  began  the  coinage  of 
the  proposed  pieces,  and  they  were  accepted  in  France  in 
public  depositories  by  virtue  of  a  decree  of  June  14,  1874. 
Their  coinage  averaged  about  3,000,000  florins  ($1,500,000) 
per  year,  until  it  was  suspended  by  the  laws  which  reorgan- 
ized the  monetary  system  in  1892. 

The  domestic  troubles  which  broke  out  in  Austria  before 
the  defeat  of  Sadowa  led  to  the  reorganization  of  the  Empire 
according  to  the  system  of  dualism  which  now  prevails.  The 
Hungarian  Diet  was  convoked  at  Pesth  on  November  19, 
1866,  and  a  basis  of  union  with  Austria  upon  the  conditions 
of  local  independence  was  prepared  by  a  committee  of  sixty- 
seven  headed  by  Francis  Deak.  The  Hungarian  budget 
was  to  be  entirely  independent  of  that  of  Austria  in  all  in- 
ternal affairs  except  those  affecting  the  army.  The  officials 
of  the  bank  regarded  their  interest  as  fully  protected  in  both 
Austria  and  Hungary  by  the  law  of  1862,  but  the  bank  soon 
found  its  rights  in  Hungary  called  in  question  and  sought  a 
new  arrangement  which  would  place  them  beyond  attack. 
The  Hungarian  Diet  passed  a  vote  early  in  1870,  promising 
recognition  to  the  bank  until  the  expiration  of  its  privileges 
in  1876,  if  the  bank  would  consent  to  a  payment  to  Hungary 
in  the  same  proportion  as  that  made  to  Austria,  and  if  it 
would  establish  at  Buda-Pesth  an  independent  directorate 
for  Hungary.  The  bank  was  willing  to  make  a  payment  of 
4,500,000  florins,  but  this  was  not  acceptable  to  the  Hun- 
garian cabinet  and  the  privileges  of  the  bank  approached 
expiration  without  an  agreement.  The  Imperial  government 


THE  AUSTRO-HUNGARIAN  BANK.  22$ 

then  brought  forward  a  plan  for  terminating  the  existence 
of  the  National  Bank  of  Austria  and  substituting  in  its 
place  a  new  institution  to  be  known  as  the  Austro- Hungarian 
Bank.  The  proposition  became  law  and  the  new  institution 
was  established  for  a  term  beginning  July  i,  1878,  and  end- 
ing December  31,  1887.  The  charter  was  afterwards  re- 
newed for  a  period  of  ten  years  ending  on  December  31,  1897. 

The  new  bank  succeeded  to  all  the  transactions  of  the  old 
and  a  directorate  was  established  at  Buda-Pesth  and  a  sum 
of  50,000,000  florins  ($25,000,000)  set  aside  for  discounts 
and  advances  in  Hungary.  The  bank-notes  of  the  institu- 
tion are  required  to  be  printed  in  both  the  German  and 
Hungarian  tongues  and  to  bear  the  arms  of  the  monarchy. 
The  governor  of  the  bank  is  named  by  the  Emperor,  upon 
the  joint  nomination  of  the  finance  ministers  of  Austria  and 
Hungary,  and  the  two  deputy  governors  are  chosen  from  the 
two  parts  of  the  Bmpire.  The  changes  made  in  the  pro- 
visions for  the  note  circulation  had  in  view  the  new  charac- 
ter of  the  bank  as  a  representative  of  the  two  monarchies  and 
the  purpose  of  the  government  to  resume  specie  payments. 
The  certificates  and  matured  coupons  of  the  Austrian  and 
Hungarian  debt  were  included  among  the  legal  securities 
for  the  covered  circulation  and  it  was  provided  that  the  two 
principal  establishments  at  Vienna  and  Buda-Pesth  might 
issue  bills  on  deposits  of  silver  coin  and  bullion  at  the  rate 
of  forty-five  florins  to  the  pound  of  fine  silver.  This  pro- 
vision became  inoperative  when  the  government  in  1879 
suspended  the  coinage  of  silver  on  private  account. 

The  amount  of  200,000,000  florins  has  been  steadily  ad- 
hered to  as  the  limit  of  the  uncovered  circulation,  but  the 
rule  is  now  followed  of  keeping  coin  and  foreign  gold  bills 
to  the  amount  of  forty  per  cent,  of  the  entire  volume  of 
bank-notes  in  the  hands  of  the  public.  The  difficulties 
caused  by  a  rigid  limit  of  circulation  in  1873  were  guarded 
against,  upon  the  extension  of  the  bank  charter  in  1887,  by 
the  adoption  of  the  German  system  of  the  five  per  cent,  tax 
on  the  circulation.  The  method  of  determination  is  sub- 
stantially the  same  as  in  the  case  of  the  German  Imperial 


224          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

Bank.  Weekly  reports  are  required,  and  upon  the  amount 
by  which  the  aggregate  circulation  exceeds  the  sum  of  the 
metallic  reserve  and  the  uncovered  circulation  of  200,000,000 
florins,  a  tax  is  levied  of  -£$  of  one  per  cent,  for  the  weekly 
excess.  The  notes  of  the  Austro- Hungarian  Bank  are  a 
legal  tender  throughout  the  Empire  for  their  full  nominal 
value  in  all  payments  to  be  made  in  Austrian  money,  in  the 
absence  of  a  specific  contract  or  a  judicial  decision  requiring 
payment  in  specie.1 

The  authorized  limit  of  circulation  has  been  exceeded  on 
several  occasions  since  the  law  levying  the  five  per  cent,  tax 
on  the  excess  and  the  tax  has  been  levied  for  fifteen  different 
weeks.  The  first  occasion  was  in  the  autumn  of  1890,  when 
the  limit  was  exceeded  656,440  florins  in  the  week  of  Octo- 
ber 7th,  and  the  excess  of  circulation  rose  to  23,257,080 
florins  during  the  week  of  October  3ist.  The  excess  of  cir- 
culation declined  to  17,093,710  florins  in  the  following  week 
and  disappeared  in  the  week  of  November  i4th.  The  au- 
tumn of  the  next  year  again  required  an  excess  of  circula- 
tion, which  began  in  the  week  of  September  3oth  and 
reached  7,186,560  florins  in  the  next  week.  This  excess 
was  reduced  to  223,780  florins  in  the  week  of  October  i5th, 
and  then  disappeared,  only  to  reappear  in  the  last  week  in 
October  and  to  rise  to  13,267,040  florins  in  the  week  of 
November  7th.  The  amount  was  reduced  in  the  next  week 
to  3,463,370  florins  and  disappeared  in  the  week  of  Novem- 
ber 22d.  There  was  a  small  excess  during  the  closing 
week  of  1891,  but  none  appeared  again  until  October,  1893, 
when  the  maximum  was  6,767,120  florins  for  the  week  of 
October  3 1  st.  This  was  reduced  to  218,120  florins  for  the 
week  of  November  7th  and  disappeared  in  the  week  follow- 
ing. There  was  no  excess  of  circulation  subject  to  the  five 
per  cent,  tax  during  1894  and  1895. 

The  essential  steps  towards  the  resumption  of  specie  pay- 
ments in  Austria- Hungary  were  taken  by  the  monetary  laws 
of  1892.  The  ministers  of  finance  of  the  two  parts  of  the 


,  I.,  458. 


THE  AUSTRO-HUNGARIAN  BANK.  22$ 

Kmpire  on  February  26,  1892,  invited  a  number  of  eminent 
financiers  and  political  economists  to  meet  and  consider  the 
following  questions : 

1 .  What  standard  ought  to  be  adopted  when  the  currency 
is  reformed  ? 

2.  In  case  of  the  adoption  of  the  gold  standard,  should  a 
limited  circulation  of  silver  money  be  admitted  and  to  what 
amount  ? 

3.  Is  the  circulation  of  government  notes  advisable,  bear- 
ing no  interest,  redeemable  in  legal  money  and  not  made  a 
forced  legal  tender,  and  under  what  conditions  ? 

4.  According  to  what  principles  should  the  conversion  into 
gold  of  the  existing  florin  be  regulated  ? 

5.  What  monetary  unit  is  it  advisable  to  choose  ? 

The  inquiry  in  Austria  was  entrusted  to  a  commission  of 
thirty-six  persons,  under  the  presidency  of  Herr  Steinbach, 
the  Minister  of  Finance,  and .  the  sittings  continued  from 
March  8th  to  March  iyth.  The  inquiry  in  Hungary  was 
made  by  a  commission  of  twenty-one  under  the  presidency 
of  Herr  Wekerle.  The  first  question  was  answered  by  a 
large  majority  in  favor  of  the  gold  standard.  The  second 
question  led  to  a  greater  division  of  opinion,  but  the  majority 
seemed  disposed  to  favor  as  large  a  use  of  silver  as  was  com- 
patible with  the  absolute  maintenance  of  the  gold  standard. 
The  majority  also  favored  the  continuance  of  a  circulation 
of  50,000,000  to  100,000,000  florins  in  government  notes  not 
fully  covered  by  coin.  A  few  believers  in  a  strictly  metallic 
currency  opposed  any  such  use  of  paper  money,  and  argued 
that  its  continuance  would  shake  confidence  in  the  monetary 
system.  The  fifth  question  was  answered  in  favor  of  the 
maintenance  of  the  florin  or  its  division  into  two  parts,  if 
a  smaller  unit  were  desired.  The  answer  to  the  fourth 
involved  the  old  controversy  regarding  the  effects  of  the 
restoration  of  a  metallic  standard  after  business  had  been 
conducted  and  contracts  made  for  many  years  on  a  depre- 
ciated paper  basis.  The  definite  answer  to  this  and  the  other 
questions  was  finally  given  by  the  government,  without  fol- 
lowing in  all  respects  the  recommendations  of  the  commission. 


226          HISTORY  OF  MODERN  BANKS   OF  ISSUE. 

The  proposals  of  the  ministry  were  submitted  to  the  Par- 
liament of  both  countries  on  May  14,  1892,  and  were  made 
law  throughout  the  Empire  on  August  i  ith.  The  crown 
(kronen}  was  made  the  monetary  unit  upon  the  basis  of 
cutting  a  kilogram  of  fine  gold  into  3280  crowns,  and  a 
kilogram  nine-tenths  fine  into  2952  crowns.  The  value  of 
the  new  coin  in  United  States  money  is  20.3  cents  or  about 
one-twentieth  more  than  the  French  franc.  The  crown  was 
divided  into  100  heller,  and  gold  pieces  of  ten  and  twenty 
crowns  were  ordered  to  be  coined.  Austrian  ducats  were 
still  authorized  to  be  coined  as  money  of  commerce,  but  the 
coinage  of  pieces  of  four  and  eight  florins  under  the  terms 
of  the  treaty  with  France  was  discontinued.  Silver  pieces 
were  provided  for  of  one  crown  ($0.203)  and  of  fifty  heller 
(Jo.  1015)  and  nickel  and  bronze  pieces  of  smaller  denomina- 
tions. The  silver  pieces  were  to  contain  only  835  parts 
silver  in  1000  parts,  making  them  substantially  token  coins, 
and  their  legal  tender  quality  was  limited  to  fifty  crowns 
($10). ' 

The  government  decided  to  convert  the  paper  money  at 
the  rate  of  one  florin  for  two  crowns.  This  was  the  rate 
which  was  under  discussion  by  the  commission,  and  while 
it  adhered  pretty  closely  to  the  current  rate  of  exchange  it 
involved  a  reduction  of  the  nominal  value  of  the  paper  in 
gold  about  sixteen  per  cent.2  It  had  been  urged  by  several 
members  of  the  commission  that  it  was  desirable  to  convert 
foreign  obligations  upon  the  basis  of  parity  in  gold,  in  order 
to  maintain  the  public  credit,  even  if  it  were  more  just  to 
convert  the  money  of  domestic  circulation  at  the  rates  which 
had  ruled  for  a  dozen  years.3  The  problem  of  conversion 
was  complicated  by  the  fact  that  the  Austrian  metallic 
standard,  so  far  as  there  had  been  any,  had  been  silver  rather 


1  Ordinance  of  August  8,  1892,  Bulletin  de  Statistique,  Sept.,  1892, 
XXXII.,  318-22. 

2 Two  crowns  being  worth  40.6  cents,  their  even  exchange  for  one 
florin,  nominally  worth  48.2  cents,  left  a  reduction  of  7.6  cents  in  the 
value  of  the  florin,  which  is  about  i6per  cent. 

3  Raffalovich,  Le  MarchZ  Financier  en  1892,  96. 


THE  AUSTRO-HUNGARIAN  BANK.  22/ 

than  gold  and  many  obligations  were  specifically  payable  in 
silver.  The  suspension  of  silver  coinage  on  private  account 
in  1879  gave  a  fictitious  value  to  Austrian  silver  coins,  just 
as  it  was  attempted  by  the  British  government  to  give  such 
a  value  to  Indian  rupees  in  1893,  and  the  florin  ceased  to 
fluctuate  with  the  silver  bullion  market  while  remaining 
below  both  gold  and  paper.  The  government  did  not  in 
1879,  however,  abandon  the  silver  standard  and  from  1879 
to  1891  coined  not  less  than  125,500,000  silver  florins  at  the 
mints  of  Vienna  and  Kremnitz.  The  rate  of  conversion 
adopted  for  the  paper  currency,  therefore,  was  not  exactly 
the  scaling  of  a  gold  obligation,  for  gold  only  became  the 
standard  011  the  date  that  the  rate  of  conversion  was  fixed. 
The  rate  represented  about  the  average  exchange  from  1879 
to  1891. 1 

The  bank  was  required  to  establish  gold  payments  upon 
the  basis  of  the  new  rate  of  exchange.  The  result  was  a 
considerable  benefit  to  the  bank,  for  it  had  in  its  vaults  on 
August  7,  1892,  59,757,000  florins  in  gold  and  20,428,000 
florins  in  foreign  bills  payable  in  gold,  which  at  the  new 
rate  acquired  a  higher  nominal  value.  The  bank  carried 
1 3, 50°) ooo  florins  in  foreign  bills  to  its  special  reserve  fund, 
and  was  still  able  on  August  i5th  to  report  a  cash  reserve  of 
70,666,000  florins,  including  619,876  florins  received  during 
the  preceding  week,  and  foreign  bills  in  hand  payable  in 
gold,  to  the  amount  of  10,404,000  florins.2  The  addition  was 
made  to  the  special  reserve  fund  in  order  to  avoid  increas- 
ing the  limit  of  covered  note  issues,  which  was  not  thought 
advisable  without  consultation  with  the  government.  The 
entire  operation  was  simply  a  matter  of  bookkeeping  and 
added  nothing  to  the  real  resources  of  the  bank  or  to  the 
value  of  its  gold.  The  gold  had  formerly  been  counted  at 
its  face  value,  while  its  real  value,  expressed  in  terms  of 
depreciated  paper,  was  much  greater.  The  change  simply 
recognized  this  fact  and  in  bringing  the  gold  and  paper 


1  Haupt,  58-64. 

2  Le  Marche  Financier  en  1892,  102. 


228          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

together  gave  a  nominal  value  to  the  former  corresponding- 
to  the  reduced  standard.  The  purchasing  power  of  a  given 
weight  of  gold  remained  the  same  under  either  method  of 
bookkeeping,  but  the  gold  was  intended  to  become  tinder  the 
new  system  a  money  of  actual  circulation  instead  of  a  bullion 
reserve  expressed  in  a  standard  above  the  real  one. 

The  importation  of  gold  followed  quickly  on  the  estab- 
lishment of  the  standard  and  was  promoted  by  the  policy 
of  the  bank,  which  raised  the  discount  rate  and  made 
advances  to  facilitate  arbitrage  transactions  when  exchange 
seemed  to  be  unfavorable.  The  receipts  of  gold  by  the 
bank  from  April  nth  to  October  10,  1892,  were  38,759,000 
florins  ($19,000,000),  of  which  a  large  part  was  in  pieces  of 
American  origin.  Receipts  from  India  became  heavy  in 
November  and  raised  the  total  receipts  from  August  nth, 
the  date  of  the  promulgation  of  the  new  laws,  to  December 
31,  1892,  to  39,447,000  florins.  The  state  also  availed  itself 
of  foreign  bills  in  its  possession  to  accumulate  gold  and  at 
the  close  of  1892  had  about  40,000,000  florins  in  the  hands 
of  the  Austrian  ministry  and  50,000,000  florins  in  the  hands 
of  the  Hungarian  ministry.  A  new  project  was  adopted 
in  1894  for  retiring  the  government  paper  money  and  sub- 
stituting bank-notes  and  subsidiary  silver.  An  arrangement 
was  made  with  the  Austro-Hungarian  Bank  to  sell  40,000,- 
ooo  florins  in  silver  for  coinage  into  pieces  of  one  crown  and 
to  issue  160,000,000  florins  in  bank-notes  as  the  government 
notes  were  received  and  cancelled.  The  Treasury  agreed  to 
pay  over  to  the  bank  200,000,000  florins  in  gold  ($100,000,- 
ooo),  which  was  to  be  used  only  as  the  coin  guarantee  of  the 
new  notes,  florin  for  florin.  The  first  notes  retired  were 
those  of  one  and  five  florins  and  considerable  opposition 
developed  among  the  people  at  surrendering  the  convenient 
paper  notes  for  the  more  cumbersome  silver.  An  economist 
of  note,  Max  Wirth,  urged  that  the  retirement  of  paper 
should  begin  with  notes  of  50  florins  ($25)  instead  of  the 
small  notes,  but  the  government  adhered  to  its  original  plan.1 


1  Raffalovich,  Marche  Financier  en  1893-4,  113. 


THE  AUSTRO-HUNGARIAN  BANK.  22g 

The  crisis  of  1893  in  the  United  States  and  the  rather 
unfavorable  condition  of  the  money  market  in  Germany 
had  a  reflex  influence  upon  Austria  which  arrested  her  steps 
towards  a  gold  basis  and  prevented  any  considerable  increase 
in  her  gold  fund  during  that  year.  The  reappearance  of  a 
premium  on  gold,  running  from  three  to  seven  per  cent.,  in 
paper  money  and  bank  notes,  caused  a  deal  of  disappoint- 
ment and  much  inquiry  as  to  the  reason.  The  critics  of  the 
government  ascribed  it  to  the  attempt  to  convert  the  old  five 
percent,  obligations  into  four  per  cents.,  which  resulted  in 
bringing  back  into  Austria  a  large  quantity  of  securities 
held  abroad.  It  was  calculated  that  the  importations  of 
securities  during  1893  exceeded  the  exports  by  114,690,000 
florins  ($57,000,000).'  The  Minister  of  Finance  pointed  out 
that  this  inward  current  was  almost  wholly  in  securities 
payable  in  silver  and  that  it  was  necessary  to  cut  the  bond 
which  nominally  bound  the  two  metals  together  in  the 
Austrian  currency  system.  A  reason  was  found  for  the 
change  in  some  quarters  in  the  state  of  the  money  market 
at  Berlin,  which  was  swamped  with  South  American  and 
other  securities  of  little  value,  which  had  absorbed  the 
ready  money  of  German  capitalists.  The  Austrian  securi- 
ties were  among  the  few  of  real  value  which  were  held  in 
Germany,  and  money  could  be  recovered  at  the  smallest  loss 
by  returning  them  to  Austria,  whose  people  were  buying 
their  own  securities  at  good  prices.  This  tendency,  though 
doubtless  heightened  in  the  case  of  Austria  by  the  convei- 
sions  and  by  the  fear  of  payment  in  silver,  only  confirmed  a 
principle  which  has  become  marked  in  recent  years — that 
the  securities  issued  by  a  solvent  power  tend,  after  their 
original  placement,  to  return  into  the  hands  of  its  own 
people.  This  was  observed  in  the  United  States  in  1878, 
when  it  was  estimated  that  five-sixth  of  the  public  debt  had 
returned  into  the  hands  of  Americans  ;  in  France,  after  the 
great  loans  to  pay  the  German  war  indemnity ;  and  even 
in  Italy,  who  originally  paid  two-thirds  of  her  interest 


1  Neue  Freie  Presse,  January  i,  1894. 


230 


HISTORY  OF  MODERN  BANKS  OF  ISSUE. 


charges  abroad,  but  now  pa}rs  hardly  a  fifth  outside  the 
Kingdom.1 

The  action  of  the  government  in  buying  silver  for  sub- 
sidiary coinage  from  the  bank  is  proving  a  great  aid  to  the 
latter  in  solving  the  problem  what  to  do  with  its  large 
stocks  of  silver  accumulated  when  that  metal  was  near  the 
old  parity  with  gold.  The  cash  reserve  of  the  National 
Bank  of  Austria  and  of  the  Austro-Hungarian  Bank  con- 
sisted almost  exclusively  of  silver  while  that  metal  was  at 
a  premium  over  gold,  but  gold  began  to  flow  into  the  bank 
in  1871,  to  constitute  about  half  the  reserve.  The  gold  then 
remained  nearly  stationary  for  ten  years,  while  the  silver 
rapidly  increased.  The  efforts  to  resume  specie  payments 
have  strengthened  the  gold  resources  of  the  bank,  but  they 
are  still  threatened  by  the  accumulation  of  silver.  The 
proportion  of  gold  and  silver  held  and  other  general  statis- 
tics of  the  National  Bank  of  Austria  and  of  the  Austro- 
Hungarian  Bank  appear  in  the  following  table  : 


YEAR. 

SPECIE  RESERVE. 
DEC.  3IST. 
GOLD.                      SILVER. 

MEAN   CIRCU- 
LATION. 

MEAN  CURRENT 
ACCOUNTS. 

MEAN  DIS- 
COUNTS. 

1865 

i-5 

(In  millions 
I2O.O 

of  florins.) 
350.0 

i-3 

1870 

1.4 

II2.9 

296.8 



1875 

67.8 

66.5 

286.2 

1-5 



1880 

65.0 

108.3 

316.6 

1-4 

II3-4 

I883 

77-7 

121.  7 

457-7 

1.9 

144.2 

1884 

78.8 

126.6 

358.4 

2.1 

136.4 

1885 

69.1 

129.7 

347-4 

2.7 

H7.5 

1887 

71.0 

145.1 

366.0 

2.2 

I29.I 

1888 

59-° 

154.0 

384.6 

5.6 

ML? 

ISSQ 

54-3 

162.2 

399-3 

7.2 

149.2 

iSgO 

54-0 

165.5 

415.6 

7-3 

156.7 

1892 

103.2 

168.9 

425-9 

8.3 

I5L2 

1893 

IOT.8 

161.9 

464.0 

ii.  i 

168.3 

1894 

155.3 

139.2 

458.9 

10.7 

I5I.6 

1895 

244.0 

126.6 

6i9.S2 

246.32 

The  circulation  and  the  discounts  of  the  bank  fluctuate 
with  the  seasons.  The  maximum  circulation  in  1894  was 
517,742,000  florins,  for  the  week  ending  October  3ist,  and 

1  Leroy-Beaulieu,  II.  228-29. 

2  Actual  conditions  December  3ist. 


THE  AUSTRO-HUNGARIAN  BANK.  231 

the  minimum  circulation  was  409,349,000  florins,  for  the 
week  ending  February  23d.  The  maximum  discounts  were 
190,023,000  florins,  for  the  week  of  November  yth,  and  the 
minimum  discounts  were  106,841,000,  for  the  week  of  Feb- 
ruary 1 5th.  The  note  circulation  on  June  7,  1895,  was 
501,692,640  florins,  and  the  discounts  were  150,280,783 
florins.  The  gold  reserve  on  that  date  had  increased  to 
192,262,330  florins,  and  the  silver  had  been  reduced  to 
135,093,317  florins.  The  reserve  fund  of  the  bank  consists 
of  32,520,824  florins.  The  circulation  at  the  close  of  1894 
consisted  of  206, 425, 360  florins  in  lo-florin  notes,  179,578,800 
florins  in  loo-florin  notes,  and  121,804,000  florins  in  1000- 
florin  notes.  The  gross  product  of  the  operations  of  the 
bank  in  1894  was  IO>44°>566  florins,  and  the  cost  of  admin- 
istration was  3,801,041  florins,,  leaving  6,639,524  florins  to 
be  divided  between  the  shareholders  and  the  government. 
A  dividend  of  five  per  cent.  (4,500,000  florins)  is  first  dis- 
tributed by  law  among  the  shareholders,  four  per  cent,  of 
the  remainder  goes  to  the  reserve  fund,  the  dividend  of  the 
shareholders  is  raised  to  seven  per  cent,  if  the  balance  per- 
mits, and  the  remainder  is  divided,  half  to  the  shareholders 
and  half  to  the  public  Treasury,  Austria  taking  seventy  per 
cent,  and  Hungary  thirty  per  cent.  The  government  has 
not  realized  much  from  this  arrangement,  the  entire  amount 
in  1894  being  only  129,101  florins  ($65,000).  The  amount, 
moreover,  is  not  paid  into  the  public  Treasury,  but  is  set  off 
against  a  loan  of  80,000,000  florins,  made  to  the  government 
in  1863,  which  was  reduced  on  December  31,  1894,  to 
76,986,975  florins. 

The  rate  of  discount  of  the  National  Bank  varied  between 
1817  and  1862  from  five  to  eight  per  cent.,  and  from  1863  to 
the  fusion  with  the  Austro-Hungarian  Bank  in  1878  never 
went  higher  than  six  and  a  half  per  cent.  The  changes  in 
the  rate  of  discount  during  these  fifteen  years  were  twelve, 
while  those  of  the  Bank  of  England  were  one  hundred  and 
fifty-two,  of  the  Bank  of  France  forty-six,  and  of  the  Bank 
of  Prussia  forty-five.  The  mean  rate  of  the  National  Bank 
of  Austria  was  not  more  than  eight-tenths  of  a  cent  above 


232          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

that  of  the  Bank  of  England  nor  more  than  seven-tenths 
above  that  of  the  Bank  of  France,  in  spite  of  the  much  more 
complete  industrial  development  of  the  latter  countries.1 
The  rate  has  varied  even  less  during  the  seventeen  years  of 
the  history  of  the  consolidated  bank.  Fixed  at  four  per 
cent,  on  May  9,  1879,  it  was  raised  to  five  per  cent.  October 
20,  1882,  reduced  to  four  and  a  half  on  February  3,  1883, 
and  to  four  per  cent,  on  February  23,  1883.  The  rate  was 
raised  again  to  four  and  a  half  on  October  7,  1887,  and  re- 
duced to  four  percent,  on  January  n,  1888.  The  rate  of 
four  per  cent,  has  been  pretty  uniformly  maintained  during 
the  early  part  of  the  j^ear  for  the  past  seven  years,  but  the 
autumn  rate  has  usually  been  higher,  reaching  in  1890  five 
and  a  half  per  cent.  An  increase  from  four  to  five  per  cent, 
was  made  on  October  7,  1893,  but  was  followed  by  a  reduc- 
tion to  four  and  a  half  in  the  second  half  of  January,  1894, 
and  to  four  per  cent,  on  February  9th,  where  it  remained 
throughout  the  year  and  until  the  autumn  of  1895,  when  it 
was  put  at  five  per  cent. 

The  number  of  branches  of  the  Austro-Hungarian  Bank 
had  risen  in  1895  to  34  in  Austria  and  21  in  Hungary,  out- 
side the  principal  establishments  at  Vienna  and  Buda-Pesth. 
The  bank  at  Buda-Pesth  has  been  rapidly  gaining  in  recent 
years  in  volume  of  business  over  the  bank  of  Vienna,  and 
the  development  of  Hungary  from  a  purely  agricultural  to 
an  industrial  country  has  created  a  jealousy  which  threat- 
ens the  perpetuation  of  the  bank  in  its  dual  form.  The  dis- 
counts at  Buda-Pesth,  which  were  16,853,181  florins  at 
the  close  of  1875  against  discounts  at  Vienna  of  51,109,319 
florins,  advanced  at  the  close  of  1890  to  35,688,570  florins  at 
Buda-Pesth  against  53,253,903  florins  at  Vienna,  and  at  the 
close  of  1894  to  43,410,814  florins  at  Buda-Pesth  against 
41,649,846  florins  at  Vienna.2 

1  Noel,  I.,  382,  434. 

2  Regelmassige  Jahressikung der  Generalversammlung  der  Oester- 
reichisch-ungarischen  Bank,  am  4  Februar,  1895,  31-2.     The  author 
is  indebted  to  the  courtesy  of  the  officials  of  the  bank  for  their  stat- 
utes and  full  official  reports  for  several  years  past. 


THE  AUSTRO-HUNGARIAN  BANK.  233 

The  tendency  towards  separate  local  institutions  in  Hun- 
gary has  led  to  considerable  discussion  of  the  project  of 
separate  banks  of  issue  for  the  two  sections  of  the  Empire 
and  this  was  one  of  the  reasons  why  the  project  for  the  re- 
newal of  the  charter  proposed  by  the  Imperial  Bank  in  the 
spring  of  1894  was  not  accepted  by  the  two  governments. 
The  bank  proposed  that  the  Austrian  government  reimburse 
at  once  the  debt  of  77,000,000  florins,  which  is  in  process  of 
slow  reduction  by  the  application  of  the  government  share  in 
the  dividends.  The  bank  maintained  that  this  reimburse- 
ment was  required  in  order  to  strengthen  its  position  in 
resuming  cash  payments.  The  proposals  offered  some  com- 
pensating advantages  to  the  government  by  giving  it  a  share 
in  the  dividends  when  the  net  profits  exceeded  six  per  cent., 
instead  of  seven  per  cent. ,  as  under  existing  law.  The  bank 
asked,  on  its  side,  to  have  the  Treasury  funds  confided  to 
its  keeping  and  to  have  its  capital  reduced  from  QO,OOO,OOO 
florins  to  75,000,000  florins.  The  bank  expressed  its  willing- 
ness to  submit  at  the  same  time  to  the  supervision  of  an 
official  board  of  curators  like  that  of  the  Bank  of  Germany, 
which  should  control  its  general  policy.  The  issue  of  bills, 
the  administration  and  the  policy  of  the  two  divisions  of  the 
bank  were  to  continue  under  one  head.  The  issue  of  bills 
below  fifty  crowns  ($10)  was  to  be  suspended  or  the  subject 
left  open  for  conference  between  the  bank  and  the  two  gov- 
ernments of  Austria  and  Hungary.  The  charter  of  the  bank 
was  to  be  continued  under  these  conditions  until  191 2. l 

Complaint  is  already  being  made  in  Austria  that  the  with- 
drawal of  the  government  paper  money  will  produce  a  con- 
traction of  the  currency  which  will  prove  a  detriment  to 
industry  and  trade.  Gold  has  not  yet  appeared  to  any 
considerable  extent  in  the  circulation  and  the  silver  pieces 
of  one  florin  are  less  popular  than  the  paper  money  which 
has  heretofore  been  used  for  daily  transactions.  The  circu- 
lation is  about  800,000,000  florins  ($400,000,000),  which 
affords  an  average  of  less  than  $10  per  capita.  The  Imperial 


1  Raffalovich,  Le  Marche  Financier  en  1894-95,  152-154. 


234          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

Bank  is  restricted,  like  the  Bank  of  England,  to  a  fixed  cir- 
culation of  200,000,000  florins  in  excess  of  its  coin  reserve, 
and  the  necessity  for  a  larger  use  of  credit  instruments  has 
been  so  keenly  felt  that  the  issue  of  certificates  of  deposit  in 
even  sums  has  become  a  subject  of  serious  discussion.  The 
use  of  checks  is  not  widety  diffused  in  Austria  outside  of 
Vienna,  Buda-Pesth,  and  a  few  other  commercial  centres, 
and  the  proposition  to  issue  certificates  of  deposit  is  a  part 
of  the  general  policy  of  making  the  public  familiar  with  the 
use  of  credit  instruments.  The  Hungarian  Bank  of  Com- 
merce and  Industry  has  taken  the  initiative  and  proposes  to 
issue,  in  place  of  the  savings  deposit  bonds  heretofore  lim- 
ited to  a  minimum  of  100  florins  ($50),  small  coupons  run- 
ning as  low  as  twenty  crowns  ($4).  One  of  the  propositions 
discussed  was  to  issue  certificates  bearing  interest,  but  it 
was  evident  that  these  would  be  inconvenient  as  a  medium 
of  circulation,  because  of  the  necessity  of  computing  the 
interest,  and  would  tend  to  deprive  the  depositor  of  his  inter- 
est for  the  benefit  of  the  last  holder  of  the  certificate.  The 
plan  proposed  by  the  Bank  of  Commerce  and  Industry  is  to 
compute  the  interest  on  sums  remaining  on  deposit  and  pay 
only  the  face  of  the  certificates,  making  them  substantially 
similar  to  checks  except  that  they  are  issued  by  the  bank  for 
even  amounts.  The  coupons  in  this  respect  assimilate  closely 
to  bank-notes,  and  afford  a  good  illustration  of  the  narrow 
line  of  separation  between  checks  and  notes. 


CHAPTER  X. 

THK   BANK   OF   RUSSIA. 

Its  Essential  Character  as  an  Organ  of  the  Government — The  Paper 
Money  System  of  Russia  and  the  Efforts  to  Return  to  a  Metallic 
Basis — The  Reorganization  of  the  Bank  in  1894  and  the  Effort  to 
Assist  Commerce  and  Industry — Present  State  of  the  Circulation 
and  Discounts — The  Tendency  towards  the  Gold  Standard — The 
Finlands  Bank. 

r  I  ^HB  Bank  of  Russia  has  been  so  entirely  a  mere  organ 
of  the  State  from  its  foundation  to  the  present  time 
that  its  history  is  closely  bound  up  with  that  of  the 
paper  issues  of  the  government.  The  extension  of  accom- 
modation to  industry  and  commerce  has  been  an  element 
in  the  business  of  the  bank,  but  mainly  because  enlarged 
issues  of  paper  have  promoted  commercial  movements. 
Paper  money  has  taken  the  place  of  all  other  currency  as  a 
medium  of  circulation  in  Russia  and  while  the  bank  has  a 
considerable  store  of  gold  and  the  Treasury  has  a  greater 
store,  there  are  no  definite  indications  as  yet  of  a  complete 
return  to  a  specie  basis.  The  reorganization  of  the  bank  by 
M.  Witte  in  1894,  with  its  provisions  for  large  advances  of 
notes  to  small  farmers,  producers,  and  manufacturers,  is  in- 
tended to  be  a  step  towards  bringing  the  bank  into  closer 
harmony  with  the  commercial  interests  of  the  country  ;  but 
the  hand  of  the  government  is  placed  more  heavily  than 
even  upon  the  management  of  the  bank,  and  the  long  terms 
and  liberal  conditions  fixed  for  these  loans  involve  some 
elements  of  danger. 

Paper  money  was  introduced  into  Russia  as  early  as  1768 
and  was  welcomed  at  first  because  of  its  greater  convenience 

235 


236          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

than  the  copper  money  of  which  it  was  the  representative. 
The  pretext  was  maintained  for  a  time  that  the  paper  was 
simply  the  coined  certificate  for  the  copper,  and  the  notes, 
which  were  known  as  assignats,  were  at  a  slight  premium. 
Bureaus  were  established  at  St.  Petersburg,  Moscow,  and  in 
the  provinces  for  the  redemption  of  the  paper,  which  ma}'  be 
considered  forerunners  of  the  Bank  of  Russia.  A  ukase  of 
January  10,  1774,  prescribed  that  the  limit  of  20,000,000 
roubles  ($15,400,000)  should  never  be  exceeded  in  the  issue 
of  paper  money.  This  pledge  was  disregarded,  as  most  such 
limits  upon  paper  issues  have  been,  and  after  the  limit  had 
been  raised  to  100,000,000  roubles  ($77,200,000)  on  June  26, 
1786,  in  order  to  obtain  resources  for  war  with  Turkey,  the 
depreciation  began.  The  price  of  the  silver  rouble  had 
risen  before  the  end  of  the  century  to  1.47  in  paper  roubles 
and  the  prices  of  merchandise  had  followed  the  upward 
course  of  the  precious  metals.  The  government  endeavored 
to  protect  itself,  at  the  same  time  that  it  recognized  the  de- 
preciation of  the  paper,  by  a  ukase  of  June  23,  1794,  raising 
the  capitation  tax  paid  by  the  peasants,  ' '  in  view  of  the  fact 
that  the  increased  price  of  all  products  permits  them  to  earn 
more  by  cultivation  and  other  work . "  1 

The  four  most  serious  efforts  to  rescue  the  monetary  system 
of  the  country  from  the  mire  of  irredeemable  paper  were 
made  in  1817,  1839,  1860,  and  1881.  The  first  attempt  was 
made  by  means  of  loans  placed  both  abroad  and  at  home,  of 
which  a  part  of  the  proceeds  was  to  be  applied  to  the  retire- 
ment of  the  paper  circulation.  The  Emperor  Alexander 
I.,  after  the  peace  of  Tilsit  in  1810,  recognized  all  the  out- 
standing notes  as  a  public  debt,  pledged  the  public  faith 
to  their  redemption,  and  declared  that  no  more  paper  money 
should  be  issued.  The  circulation,  notwithstanding  these 
pledges,  climbed  upward  from  577,000,000  roubles  in  1810  to 
836,000,000  roubles  in  1817.  It  was  then  that  the  loans 

1  Paul  Leroy-Beaulieu,  La  Science  des  Finances,  II.,  656.  The  rou- 
ble is  the  exact  equivalent  of  four  francs  in  French  money  ($0.772) 
and  exchange  on  Paris  at  par  is  quoted  in  the  form  of  400  francs  for 
loo  roubles. 


THE  BANK  OF  RUSSIA.  237 

were  issued  which  had  been  promised  in  a  decree  of  May 
27,  1810,  and  the  progress  of  reform  was  so  rapid  that  the 
circulation  was  reduced  in  1822  to  595,776,000  roubles. 
Count  Cancrin  was  then  at  the  head  of  Russian  finances, 
and  he  steadily  refused  to  increase  the  paper  circulation  dur- 
ing thirteen  years,  in  spite  of  wars  in  Turkey,  Persia,  and 
Poland.  He  hesitated,  however,  at  the  policy  of  substi- 
tuting an  interest-bearing  debt  for  the  immense  mass  of 
paper  obligations  bearing  no  interest  and  did  not  succeed  in 
raising  the  value  of  the  paper  rouble  much  above  a  quarter 
of  the  rouble  of  silver.  * 

The  government  made  the  second  effort  to  reduce  the  vol- 
ume of  paper  money  by  a  decree  of  July  i,  1839,  that  the 
paper  roubles  should  be  valued  at  three  and  a  half  to  a  rou- 
ble of  silver  and  that  a  new  form  of  paper  should  be  substi- 
tuted in  this  proportion.  The  new  paper  was  to  be  known 
as  bills  of  credit  and  was  to  be  redeemable  in  silver  and 
secured  by  the  public  domain.  The  exchange  of  the  assig- 
nats  for  the  new  bills  was  ordered  to  take  place  on  June  i, 
1843,  and  a  pledge  was  given  to  the  business  community  for 
the  credit  of  the  new  paper  by  depositing  in  the  citadel  of 
St.  Petersburg  in  December,  1844,  a  metallic  reserve  of  70,- 
464,245  roubles  ($54,000,000),  which  was  to  be  under  the 
control  of  twenty-four  members  of  the  stock  exchange.  This 
fund  was  increased  on  July  14,  1845,  by  12,180,000  roubles, 
which  established  a  coin  reserve  of  nearly  fifty  per  cent,  of 
the  170,000,000  roubles  in  bills  of  credit  then  outstanding. 
A  limited  redemption  was  maintained  and  the  bills  did  not 
drop  far  below  par  until  the  Crimean  War,  but  new  issues  of 
credit  paper  were  made  even  before  the  alliance  with  Austria 
to  crush  Hungary  and  735,000,000  roubles  in  the  new  bills 
were  in  circulation  at  the  close  of  the  Crimean  War  in  1857. 

The  third  attempt  to  extricate  the  Empire  from  the  evils 
of  a  debased  monetary  standard  was  connected  with  the 
establishment  of  the  Bank  of  Russia  in  substantially  the 


1  The  greatest  depression  in  the  value  of  the  assignats  was  in  1815, 
when  100  silver  roubles  exchanged  for  418  in  paper. — L£vy,  200. 


238          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

form  in  which  it  existed  from  1860  to  1894.  The  statutes  of 
the  bank  were  established  by  a  decree  of  May  26,  1860,  and 
the  reserves  of  several  older  banking  establishments  were 
turned  into  its  coffers  and  it  assumed  their  engagements. 
The  original  capital  was  15,000,000  roubles  ($12,000,000) 
and  the  declared  object  of  the  bank  was  to  consolidate  the 
credit  circulation  and  the  floating  debt  of  the  Empire.  The 
entire  ownership  and  management  were  in  the  government, 
but  the  capital  and  reserve  funds  were  declared  to  be  invio- 
bly  set  aside  for  the  uses  of  the  bank,  and  the  private  deposi- 
tors were  guaranteed  against  confiscation.  A  third  of  the 
profits  were  to  go  to  a  reserve  fund,  part  of  which  was  to  be 
applied  from  time  to  time  to  the  increase  of  the  capital  stock.1 
The  capital  was  soon  increased  by  this  means  to  25,000,000 
roubles  and  the  reserve  fund  to  3,000,000  roubles,  where 
they  remained  until  the  reorganization  of  the  bank  in  1894. 
The  bank  had  a  metallic  reserve  on  May  I,  1861,  of  86,000,- 
ooo  roubles  against  a  circulation  of  714,627,069  roubles,  but 
the  commercial  discounts  scarcely  exceeded  14,000,000  rou- 
bles. The  depreciation  at  this  time  was  about  ten  per  cent, 
arid  M.  lyamauski,  the  deputy  governor  of  the  bank,  pro- 
posed a  plan  for  restoring  parity  and  protecting  the  note 
issues.  He  recommended  the  transformation  of  the  bank 
into  a  stock  company,  with  the  monopoly  of  note  issue  for 
twenty-eight  years,  the  redemption  of  notes  in  coin  accord- 
ing to  a  sliding  scale  gradually  approaching  par,  and  author- 
ity to  sell  the  public  domains,  the  forests  and  the  state 
railways  to  protect  the  circulation.2 

The  plan  of  M.  L,amanski  was  adopted  in  a  measure,  the 
proceeds  of  a  loan  of  15,000,000  roubles  were  carried  to  the 
coin  reserve  of  the  bank  and  it  was  decreed  that  bills  re- 
ceived in  payment  for  the  loan  should  be  destroyed  and  that 
new  bills  should  be  issued  only  against  deposits  of  coin.  A 
scale  of  depreciation  was  fixed  which  involved  the  restora- 
tion of  parity  on  January  i,  1864.  Redemptions  proceeded 

1  Clement  Juglar,  Article  "  Banque  "  in  Dictionnaire  des  Finances \ 

I.,  347- 

8  Winiarski,  57. 


THE  BANK  OF  RUSSIA.  239 

for  a  while  without  great  losses  of  coin  to  the  bank,  and 
averaged  1,250,000  roubles  per  month  up  to  January  i,  1863. 
A  run  then  began  for  the  redemption  of  the  paper,  which 
resulted  in  a  net  loss  of  coin  during  January  of  2,287,000 
roubles;  February,  4,921,000  roubles;  March,  7,723,000 
roubles;  April,  10,213,000  roubles;  May,  10,367,000  rou- 
bles ;  June,  2 ,233,000  roubles  ;  and  in  July,  6, 7 51,000  roubles. 
Various  devices  were  tried  to  stop  the  drain,  but  they  were 
unsuccessful  and  coin  redemption  was  suspended  by  a  ukase 
of  November  19,  1863.  Exchange  on  Paris,  which  had 
risen  on  October  29th  to  396  francs,  within  four  francs  of 
par,  fell  gradually  to  350  francs,  about  which  point  it  fluctu- 
ated for  some  time.  The  net  result  of  the  effort  to  restore 
specie  payments  was  a  reduction  of  the  outstanding  paper  to 
634,773,929  roubles  on  November  30,  1863,  and  a  useless 
expense  to  the  Treasury  of  nearly  100,000,000  roubles  ($75,- 
000,000). 

The  bank  was  entrusted  in  1862  with  the  mission  of  buy- 
ing lands  for  the  peasants  and  was  aided  by  the  deposit 
of  the  Treasury  funds  free  of  interest.  These  funds  were 
partly  employed  in  commercial  discounts,  which  were  so 
freely  granted  that  the  legitimate  necessities  of  commerce 
were  much  exceeded  and  a  mass  of  doubtful  paper  was  left 
in  the  hands  of  the  bank  in  the  crisis  of  1873.  The  expan- 
sion of  credits,  however,  was  chiefly  confined  to  St.  Peters- 
burg and  Moscow,  and  the  provinces  suffered  the  usual  evils 
of  a  country  endowed  with  a  single  great  bank, — the  lack 
of  capital,  of  currency,  and  of  facilities  for  credit.  The  ex- 
cess of  capital  at  the  centres  caused  reckless  speculation  and 
blind  investments  in  foreign  securities,  while  the  excessive 
issues  of  paper  money  gradually  found  an  outlet  only  after 
the  emancipation  of  the  serfs  created  a  greater  demand  for 
currency  for  wages.  One  of  the  difficulties  of  the  situation 
was  the  constantly  recurring  deficit  in  the  public  finances, 
which  called  for  new  issues  of  paper  money  to  fill  the  void. 
This  difficulty  was  overcome  for  a  moment  in  1870,  when 
the  deficit  declined  to  1,205,116  roubles,  and  during  the  next 
five  years,  which  showed  a  considerable  surplus.  The 


240          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

quotation  of  the  rouble  on  the  exchange  market  was  330 
francs  in  1876,  or  seventeen  and  a  half  per  cent,  below  par, 
when  the  menace  of  war  with  Turkey  and  of  new  issues  of 
paper  money  carried  it  down  in  1877  as  low  as  234  francs,  or 
a  loss  of  more  than  41  per  cent.1 

The  new  paper  issues  which  were  feared  soon  became  a 
reality,  in  order  to  maintain  the  armies  in  the  field.  The 
circulation  had  risen  on  December  31,  1874,  to  797,313,500 
roubles  and  the  metallic  reserve  had  increased  to  231,227,000 
roubles.  The  circulation  was  reduced  during  the  next  two 
years  until  it  stood  on  July  i,  1876,  at  693,000,000  roubles. 
The  issue  of  bills  of  credit  on  account  of  the  war  was  491,- 
000,000  roubles  and  the  net  circulation  on  December  18,  1878, 
was  1,103,280,185  roubles.  A  supplementary  issue  of  96,- 
000,000  roubles  in  1879,  with  the  famine  and  arrest  of  exports, 
caused  a  crisis  in  1880  which  reduced  the  revenues  of  the 
government  and  the  railway  receipts,  in  spite  of  high  paper 
prices,  and  caused  the  rapid  fall  of  the  coin  value  of  the 
rouble.  The  change  of  ministry  which  resulted  from  the 
crisis  brought  into  power  M.  Abasa,  who  at  once  announced 
a  plan  for  reimbursing  the  debt  of  the  government  to  the 
bank.  A  ukase  of  January  i,  1881,  ordered  that  the  Treas- 
ury pay  to  the  bank  without  delay  a  sum  sufficient  to  reduce 
to  400,000,000  roubles  the  debt  to  the  bank  on  account  of 
disbursements  for  the  government  ;  that  the  remainder  of 
the  debt  (400,000,000  roubles)  be  funded  by  annual  payments 
of  50,000,000  roubles  by  the  Treasury  to  the  bank ;  that 
bills  of  credit  be  destroyed  to  the  extent  of  their  accumula- 
tion in  the  hands  of  the  bank  and  with  due  regard  to  the 
needs  of  the  circulation.  The  first  part  of  this  programme 
had  hardly  been  carried  out  when  M.  Abasa  was  replaced  as 
Minister  of  Finance  by  M.  Bunge.  The  rigid  policy  of  re- 
form which  had  been  inaugurated  was  somewhat  relaxed  and 
the  bills  paid  into  the  bank  were  kept  on  hand  and  sub- 
sequently re-issued,  instead  of  destroyed.2  The  circulation 

1  Winiarski,  59-60. 

9  M.  Witte,  the  present  Minister  of  Finance,  has  been  subjected  to 
criticism  for  employing  92,700,000  roubles  ($71, 000,000),  paid  into 


THE  BANK  OF  RUSSIA.  241 

was  reduced  during  the  ten  jrears  from  1878  to  1888  from 
1,188,000,000  roubles  to  1,046,000,000  roubles,  but  the  value 
of  the  paper  rouble  did  not  advance  materially  towards  that 
of  gold. 

The  statutes  of  the  Bank  of  Russia  were  submitted  to  a 
complete  revision  in  1894  and  an  effort  was  made  to  make 
the  bank  of  greater  assistance  than  before  in  the  promotion 
of  industry  and  commerce.  The  first  article  of  the  new 
statutes,  promulgated  on  June  24,  1894,  declared  the  purpose 
of  the  bank  to  be  "  to  facilitate,  by  means  of  credit  for  short 
terms,  the  movement  of  commerce  and  to  promote  the  suc- 
cess of  national  industry  and  agricultural  production."  '  The 
new  vStatutes  define  with  considerable  precision  the  accom- 
modation extended  to  agriculture  and  industry  by  the  bank. 
The  institution  is  authorized  to  open  credits  and  make  loans 
against  bills  secured  by  pledges  of  hypothecation  and  by 
agricultural  or  industrial  material,  by  guarantee,  and  by 
other  sureties  which  the  Minister  of  Finance  may  recognize 
as  sufficient.  Loans  secured  on  material  are  to  be  made  only 
to  acquire  supplementary  material  or  renew  old  supplies,  but 
they  are  to  constitute  a  lien  upon  the  old  material  as  well  as 
the  new.  The  material  obtained  by  loans  from  the  bank  is 
required,  in  accordance  with  the  protective  policy  of  the 
Empire,  to  be  of  Russian  fabrication,  but  exceptions  may  be 
authorized  in  certain  cases  by  the  Minister  of  Finance  and, 
in  the  case  of  agricultural  material,  with  the  concurrence  of 
the  Minister  of  Agriculture.  The  maximum  loan  for  an 
industrial  enterprise  is  500,000  roubles  and  for  a  retail  rner- 

the  bank  for  cancellation,  in  the  construction  of  the  Trans-Sibe- 
rian Railway. — De  Cyon,  183-85.  M.  Raffalovich,  however,  credits 
the  government  with  having  known  how  "  not  to  abuse  the  issue  of 
paper  money,"  and  declares  that  "  when  the  needs  of  commerce  have 
required  a  greater  quantity  of  monetary  signs  an  issue  has  been  made 
temporarily  under  the  condition  of  a  special  guarantee." — Le  Marche 
Financier  en  /tfpj-p/,  140. 

1  Bulletin  de  Statistique,  August,  1894,  XXXVI.,  183.  The  date 
liere  given,  and  most  others  in  this  chapter,  are  according  to  the 
Julian  calendar,  whose  use  still  prevails  in  Russia,  and  are  twelve 
days  behind  the  Gregorian  dates. 

16 


242          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

chant  600  roubles.  The  maximum  term  for  loans  for  mate- 
rial is  three  years,  but  periodical  payments  are  required 
when  the  term  exceeds  six  months.  The  bank  is  authorized 
to  accept  as  security  for  loans  to  small  farmers,  peasants,  and 
mechanics,  upon  the  pledge  of  their  products,  the  guarantee 
of  the  provincial  assemblies,  institutions  of  credit  (including 
mutual  societies  which  agree  to  operate  under  the  rules 
framed  by  the  bank),  and  individuals  chosen  from  among 
the  inhabitants  of  the  respective  communities  who  inspire 
confidence  at  the  bank. 

This  new  policy  of  the  bank  has  been  subjected  to  severe 
criticism  upon  the  ground  that  the  Russian  people  are 
unused  to  operations  of  credit  and  cannot  be  trusted  to  meet 
in  good  faith  the  required  payments.  The  Minister  of 
Finance  himself,  in  his  report  recommending  the  new  sys- 
tem, referred  to  the  collapses  of  most  of  the  banks  of  com- 
merce and  of  mutual  credit  which  have  taken  place  in 
Russia  during  the  past  twenty  years  and  to  the  failure  of 
two  branches  of  the  Bank  of  Russia  at  Kief  and  Kharkof, 
which  were  authorized  to  advance  money  to  small  farmers  on 
the  guarantee  of  two  large  proprietors  and  the  certificate  of 
the  local  tribunal  that  the  property  actually  existed  upon 
which  the  advance  was  made.  More  than  2, 000,000  roubles 
were  advanced  annually  in  loans  of  this  sort,  but  great 
abuses  occurred  and  it  was  found  that  loans  were  obtained 
upon  products  which  had  no  existence  by  means  of  false 
certificates  given  by  the  authorities.1  The  government  has 
felt,  however,  that  some  losses  could  be  borne  in  teaching 
the  people  the  benefits  of  commerce  and  of  credit  and  did 
not  hesitate,  during  the  famine  of  1892  and  the  customs  war 
with  Germany  in  1893,  to  advance  to  the  suffering  peasants 
some  90,000,000  roubles  which  were  recovered  only  partially 
and  by  degrees. 

The  danger  of  loans  upon  products  is  increased,  in  the 
opinion  of  the  critics  of  the  bank,  by  the  permission  that 
the  products  on  which  loans  are  made  may  be  retained  in  the 


De  Cyon,  135-36. 


THE  BANK  OF  RUSSIA.  243 

hands  of  the  producers  and  by  the  long  terms  for  which  the 
money  is  advanced.  L,ong-term  loans,  in  the  absence  of 
large  deposits,  can  only  be  made  by  fresh  issues  of  paper 
money  and  M.  Witte  made  declarations  in  his  report  as  to 
the  effect  of  such  issues  strangely  like  the  declarations  of 
Mirabeau  when  the  French  assignats  were  authorized  and  of 
Secretary  Chase  when  he  was  urging  upon  the  American 
Congress  the  substitution  of  legal  tender  government  paper 
for  bank-notes.1  "  The  value  of  these  bills,"  says  M.  Witte, 
"issued  exclusively  for  a  useful  object,  will  be  maintained 
by  the  productiveness  of  labor,  and  the  issue  of  such  bills 
will  not  influence  the  quotations  of  the  credit  rouble,  because 
in  making  these  issues  in  a  manner  responding  to  the  object 
in  view  the  quantity  of  securities  in  circulation  will  be  at  the 
same  time  increased." 

The  government  of  Russia,  however,  has  undertaken  a 
comprehensive  policy  for  the  development  of  the  resources 
and  productive  power  of  the  country.  It  has  been  felt  by 
those  who  shape  this  policy  that  the  government  should  take 
the  initiative  in  measures  which  in  other  countries  would  be 
left  to  private  enterprise.  This  course  has  been  adopted  by 
Russian  statesmen,  not  in  ignorance  of  the  laws  of  finance 
and  political  economy,  but  under  the  conviction  that  those 
laws  would  not  come  rapidly  into  operation  to  stimulate  com- 
mercial and  credit  operations  in  an  agricultural  country 
without  the  example  of  the  leadership  of  the  state.  This 
conviction  is  the  keynote  of  the  present  policy  of  the  Bank 
of  Russia.  The  government  is  willing  to  take  steps  in  mak- 
ing loans  to  producers  which  would  not  be  taken  by  a  private 
financial  establishment,  because  it  is  willing  to  risk  some- 
thing of  the  national  wealth  for  the  sake  of  increasing  it,  and 
because  the  strong  hand  of  the  government  can  be  appealed 
to  for  the  purpose  of  punishing  defaulting  debtors.  The, 
issue  of  paper  money,  through  the  instrumentality  of  a  great 
bank,  is  felt  to  be  a  necessary  means  for  supplying  the  people 
with  that  ample  supply  of  monetary  signs  which  proved  so 


1  Vide  Ch.  xv. 


244          ni STORY  OF  MODERN  BANKS  OF  ISSUE. 

beneficial  to  France  after  the  great  influx  of  gold  from  Cali- 
fornia and  Australia  and  which  has  proved  so  beneficial  to 
Scotland  under  her  system  of  free  banking.  The  government 
has  not  put  in  jeopardy  the  solvency  of  the  bank  by  its 
agricultural  loans,  for  the  entire  amount  on  December  16, 
1895,  was  27,466,804  credit  roubles,  or  about  one-eighth  of 
the  commercial  discounts. 

The  capital  of  the  Bank  of  Russia  was  fixed  by  the  new 
statutes  at  50,000,000  roubles  ($38,000,000),  and  the  limit  of 
the  special  reserve  was  increased  from  3,000,000  roubles  to 
5,000,000  roubles.  It  was  proposed  at  first  to  raise  the  new 
capital  by  setting  aside  annually  ten  per  cent,  of  the  profits, 
but  this  process  was  soon  regarded  as  too  slow  and  a  decree 
of  February  6,  1895,  provided  for  taking  the  necessary 
amount  from  the  surplus  in  the  Imperial  Treasury.1  Losses 
by  the  bank  are  met  from  the  reserves,  and,  in  case  of  their 
exhaustion,  are  to  be  carried  to  the  debit  account  of  the 
Treasury.  The  management  of  the  bank  is  entrusted  to  the 
Minister  of  Finance  and  the  annual  accounts  are  submitted 
to  the  Imperial  Council.8  The  number  of  branches  at  the 
close  of  1895  was  107. 

The  accounts  of  the  Bank  of  Russia  are  stated  in  a  similar 
manner  to  those  of  the  Bank  of  England,  in  the  separation 
of  the  issue  from  the  banking  department.  The  bills  of 
credit  are  government  notes  for  all  practical  purposes  and 
the  bank  itself,  even  in  its  banking  operations,  is  little  more 
than  a  bureau  of  the  Treasury.  A  circulation  of  769,342,- 
911  roubles  is  based  upon  government  obligations  and  corre- 
sponds to  the  ' '  authorized  circulation  ' '  of  the  Bank  of 

1  Bulletin  Russede  Statislique,  April,  1895,  220. 

2  M.  Witte,  the  present  Finance  Minister,  has  also  created  a  board 
of  Treasury  officers  known  as  the  Council  of  the  Bank  and  corre- 
sponding,   according  to  his  view,  "  to  the  similar  councils  in   the 
central  banks  of  Western  Europe."     These  boards  take  the  place  of 
the  Council  of  Imperial  Institutions  of  Credit,  created  in  1817,  which 
contained  representatives  of  the  nobility  and  of  the  business  commu- 
nity, and  the  change  is  criticized  by  M.  de  Cyon  on  the  ground  that  it 
has  brought  the  bank  entirely  under  official  supervision   with   no 
external  check. — M.  Witte  et  les  Finances  Russes,  145. 


THE  BANK  OF  RUSSIA.  245 

Kngland.  Circulation  beyond  this  amount  is  represented  by 
the  coin  reserve  of  the  bank  and  can  be  increased  only  by 
deposits  of  coin.  The  banking  department  was  utilized  for 
several  years  for  swelling  the  paper  issues  in  much  the  same 
manner  as  when  the  suspension  of  the  bank  act  is  authorized 
in  England.  These  special  issues  consisted  for  the  most 
part  of  the  notes  which  the  bank  was  ordered  to  call  in  and 
destroy  by  the  ukase  of  1881,  but  which  were  kept  in  reserve 
until  special  authority  was  given  for  their  re-issue  against 
new  deposits  of  securities  or  transfers  of  gold  to  the  cash 
reserves.1  The  government,  by  a  ukase  of  December  9, 
1894,  abolished  the  distinction  between  the  authorized  per- 
manent circulation  and  the  temporary  circulation  charged 
against  the  banking  department  by  transferring  the  tempo- 
rary issues  from  the  banking  department  to  the  issue  depart- 
ment. The  limit  of  authorized  circulation  without  metallic 
cover  was  increased  by  this  process  from  568,513,000  roubles 
to  769,342,91 1  roubles,  exclusive  of  about  285,000,000  roubles 
covered  by  gold.  Both  sides  of  the  account  of  the  banking 
department  were  diminished  by  the  amount  thus  transferred, 
— 200,829,455  roubles, — and  by  an  additional  sum  of  65,433,- 
691  roubles  transferred  in  gold  from  the  banking  to  the  issue 
department  as  the  gold  value  of  that  part  of  the  increased 
permanent  issue  not  represented  by  securities.2 

The  total  gold  funds  of  the  bank  and  the  Treasury  on 
January  i,  1895,  were  645,731,000  roubles  ($500,000,000). 
This  sum  was  not  all  in  actual  gold  held  in  Russia,  the  sum 
of  58,331,000  roubles  representing  foreign  credits  payable  in 
gold  on  demand  ;  but  the  Treasury  alone  had  a  gold  fund  of 
194,410,000  roubles  and  the  bank  held  39,540,000  roubles  in 
gold  in  its  banking  department,  exclusive  of  that  held 
against  outstanding  notes.3  The  funds  then  set  aside  to 

1  Le*vy,  201-203. 

2  Bulletin  Russe  de  Statistique,  Jan.-Feb.,  1895,  34-37. 

3  It  is  interesting  to  note  that  28,654,937  roubles  ($21,500,000)  of  these 
holdings  was  in  American  half-eagles,  the  largest  amount  of  foreign 
coin  held  of  a  single  kind  except  38,117,580  roubles  ($29,000,000)  in 
English  sovereigns.—  Bulletin  Russe  de  Statistique,  March,  1895,  170. 


246 


HISTORY  OF  MODERN  BANKS  OF  ISSUE. 


cover  the  circulation  were  351,939,000  roubles  and  the  au- 
thorized circulation,  covered  and  uncovered,  was  1,121,282,- 
ooo  roubles  ($880,000,000).  The  government  by  a  ukase  of 
March  3,  1895,  increased  the  metallic  coverture  for  the  cir- 
culation by  transferring  from  the  Treasury  to  the  bank  98,- 
061,276  roubles  in  exchange  funds  and  substituting  i,  125,682 
in  gold  for  an  equal  amount  of  silver  in  the  bank  reserves. 
This  made  the  total  gold  funds  held  against  circulation  375,- 
ooo, ooo  roubles,  exclusive  of  75,000,000  held  against  a  special 
issue,  and  made  the  metallic  coverture  more  than  a  third  of 
the  outstanding  bills.  This  is  the  largest  reserve  ever  held, 
the  amount  between  1861  and  1869  having  risen  from  67,- 
713,000  to  92,884,000  roubles,  but  in  no  case  higher  than 
13.6  per  cent,  of  the  circulation,  and  having  risen  after 
1888  to  211,500,000  roubles,  or  about  20  per  cent.1  The  ac- 
counts of  the  bank  in  recent  years  are  shown  in  the  follow- 
ing table  : 


YEAR. 

MEAN    CIR- 
CULATION. 

MEAN   CURRENT 
ACCOUNTS. 

MEAN    TOTAL 
DEPOSITS. 

MEAN  LOANS  AND 
DISCOUNTS. 

(In  millions  of  roubles.) 

1880 

1,082.3 

IOI.4 

295.3 

228.5 

1885 

893.8 

132.3 

335.9 

205.2 

iSgO 

902.6 

65.6 

368.2 

213.2 

iSgl 

975-3 

83.2 

399-9 

189.4 

1892 

1,070.0 

I39-I 

438.2 

162.8 

1893 

1,061.9 

II4.6 

405-0 

198.0 

1894 

1,041.5 

II8.8 

495-6 

2QI.7 

i8952 

1,056.9 

I2O.7 

545-2 

327.5 

No  official  declaration  has  been  made  of  a  purpose  to 
establish  the  gold  basis  and  specie  payments  in  Russia,  but 
many  recent  events  indicate  that  the  government  has  its 
face  set  in  that  direction.  The  credit  rouble  was  originally 
redeemable  in  silver,  but  the  free  coinage  of  silver  was  sus- 
pended July  1 6,  1893,  and  the  credit  rouble  has  remained  far 
above  the  value  of  the  silver  rouble  since  the  great  fall  in 

1  Bulletin  Russe  de  Statistique,  March,  1895,  137. 

2  Actual  condition  Nov.  28th  (Dec.  loth  by  Gregorian  calendar).     The 
"  Total  Deposits  "  include  the  current  accounts  and  all  other  deposits, 
public  and  private. 


THE  BANK  OF  RUSSIA.  247 

that  metal.  Customs  duties  are  collected  in  gold  and  this 
gold  has  been  so  carefully  husbanded  that  the  bank  and  the 
Imperial  Treasury  now  possess  the  largest  visible  stock  in 
the  world.  The  strengthening  of  the  metallic  security  for 
the  circulation  at  the  close  of  1894  was  followed  by  a  ukase 
of  May  8,  1895,  °f  great  significance.  This  ukase  declared 
that  written  contracts  might  be  made  payable  in  Russian 
gold  roubles  and  that  such  contracts  might  be  settled  in  gold 
or  in  roubles  of  equivalent  gold  value  at  the  rate  of  exchange 
prevailing  at  the  date  of  payment.  Public  depositaries 
were  authorized  to  receive  gold  at  its  exchange  value  in  the 
payment  of  excises  under  regulations  framed  by  the  Minister 
of  Finance. 

The  purpose  of  this  law,  according  to  the  Messagcr  Offitiel, 
is  to  ameliorate  the  vices  of  the  regime  of  paper  money  and 
' '  to  substitute  little  by  little  that  of  metallic  money. ' '  With 
this  object,  the  journal  declares,  the  last  two  reigns  have 
provided  for  the  collection  of  customs  duties  in  gold,  the 
reduction  (projected  in  1881)  of  the  amount  of  bills  of  credit, 
and  have  taken  other  steps  ' '  which  ought  to  prepare  the 
ground  for  the  re-establishment  of  a  metallic  circulation." 
The  new  law,  it  is  declared,  does  not  touch  the  question  of 
the  monetary  standard  or  the  final  basis  of  adjustment  of 
the  paper  money  to  the  standard,  but  is  simply  intended 
to  give  an  abiding  place  in  the  circulation  for  gold,  which 
in  spite  of  the  large  Russian  production,  has  quickly  taken 
passage  for  foreign  countries.  The  existing  circulation  of 
government  paper  money  the  official  journal  found  inelas- 
tic, unresponsive  to  the  demands  for  currency  at  the  sale 
of  the  crops,  and  difficult  to  bring  back  to  the  bank  when 
over-issued.  The  new  measure  is  designed  to  permit  imports 
of  gold  when  the  money  market  is  stringent,  by  giving  gold 
a  legal  status  in  Russian  finance,  and  to  liberate  the  govern- 
ment from  the  necessity  of  proceeding  to  new  issues  of  paper. 1 

The  article  which  announced  this  policy  added  the  hint  of 


1  These  statements  are  abbreviated  from  the  article  reprinted  in  the 
Bulletin  Russe  de  Statistique,  May,  1895,  252-56. 


248          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

another  step,  which  was  soon  taken,  and  declared  that  the 
new  policy  would  attract  foreign  capital  and  inspire  confi- 
dence in  the  Russian  financial  system.  The  new  step  was. 
taken  by  a  ukase  of  June  6,  1895,  which  authorized  the 
bank  to  receive  deposits  of  gold  coin  and  bullion  and  foreign 
bank-notes  and  commercial  bills  payable  in  gold  and  to  issue 
certificates  therefor,  redeemable  in  gold  on  demand.  These 
certificates  are  receivable  as  the  equivalent  of  gold  at  the 
Treasury  and  the  bank,  but  are  not  a  legal  substitute  for 
gold  between  individuals  except  with  the  consent  of  the 
creditor.  They  are  receivable  at  branches  of  the  bank  for 
gold  obligations  due  at  other  branches  and  the  exchange  is 
furnished  free  except  for  the  cost  of  telegraphic  service.1 
These  important  acts  were  followed  on  July  26,  1895,  by  the 
promulgation  of  rules  permitting  the  creation  of  special  gold 
accounts  at  the  bank,  for  the  reception  of  gold  and  gold 
certificates,  and  the  issue  of  check -books  representing  pay- 
ments exclusively  in  gold.  The  public  are  thus  being  grad- 
ually prepared,  by  the  flow  of  a  stream  of  gold  through  the 
Treasury  and  the  banks,  for  the  establishment  of  gold  pay- 
ments and  the  maintenance  of  a  fixed  relation  between  the 
credit  rouble  and  the  metallic  standard. 

The  Bank  of  Russia  has  established  recently  a  fixed  rate 
of  exchange  for  credit  roubles  and  gold  in  the  ratio  of  one 
and  a  half  to  one.  If  this  ratio  of  exchange  could  be  re- 
garded as  permanent,  and  should  be  maintained  in  spite  of 
a  heavy  demand  for  gold,  it  would  amount  substantially  to 
the  resumption  of  gold  payments  upon  the  basis  proposed  by 
the  government  of  Austria-Hungary  in  the  legislation  of 
1892.  The  Bank  of  Russia  has  felt  strong  enough  to  estab- 
lish this  fixed  rate  of  exchange  in  order  to  arrest  speculation 
in  credit  roubles  abroad,  which  has  always  become  acute  at 
the  time  for  the  settlement  by  foreign  purchasers  for  the  agri- 
cultural exports  of  Russia.  The  bank,  by  establishing  this 
rate  of  exchange  for  gold  and  paper,  has  voluntarily  aban- 
doned the  silver  standard,  by  which  the  credit  rouble  would  be 


1  Bulletin  Russe  de  Statistique ,  July-Aug.,  1895,  27. 


THE  BANK  OF  RUSSIA.  249 

worth  in  gold  only  fifty  per  cent,  of  its  face  value  and  about 
twenty-five  per  cent,  less  than  its  present  market  value.  The 
attempt  to  bring  the  credit  rouble  to  par  in  gold, — a  metal 
in  which  it  was  never  redeemable  by  law, — would  depress 
the  price  which  the  farmer  receives  for  his  product  in  credit 
roubles,  while  wages  and  rents  would  remain  substantially 
unchanged.  The  position  of  Russia  as  an  agricultural  and 
exporting  country  is  felt  to  be  adverse  to  this  policy.  For 
this  reason,  while  the  Bank  of  Russia  is  as  strong  as  any 
European  bank  in  its  accumulation  of  coin  reserves,  the 
Russian  government  will  not  for  many  years  attempt  the 
complete  retirement  of  the  paper  currency. 

The  Grand  Duchy  of  Finland,  which  is  independent  of 
Russia  in  its  internal  affairs,  has  a  bank  of  issue  known  as 
the  Finlands  Bank,  or  Bank  of  the  State.  The  capital  is 
10,000,000  Finnish  marks  ($2, 000,000)'  and  the  bank  is  gov- 
erned by  managers  appointed  by  the  Russian  Emperor,  who 
is  Grand  Duke  of  Finland,  upon  the  nomination  of  deputies 
of  the  States.  The  circulation  is  not  permitted  to  exceed 
35,000,000  marks  except  upon  deposits  of  coin.  The  actual 
circulation  on  September  30,  1895,  was  55,547,000  marks  ; 
gold  reserve,  21,860,000  marks;  foreign  credits,  31,008,000 
marks  ;  loans  and  inland  bills,  26,687,000  marks  ;  deposits, 
17,369,000  marks.2 


1  The  present  Finnish  coinage  system  is  based  upon  that  of  the 
Latin  Union,  the  markka  being  the  equivalent  of  the  franc  ($o.  193). 

2  Comptroller's  Report,  1895,  Letter  of  Minister  Breckinridge,  98-99. 


CHAPTER  XI. 

THE  BANKS  OF  NORTHERN  EUROPE. 

Development  of  Banks  of  Issue  in  Belgium — The  Strain  Put  upon 
the  National  Bank  by  the  Franco-Prussian  War — Difficulties 
Caused  by  the  Double  Standard — The  Bank  of  Amsterdam  and 
Modern  Banking  in  Holland — Organization  of  the  Banks  of 
Sweden,  Norway,  and  Denmark. 

THE  history  of  banking  in  Belgium  is  a  history  of  greater 
freedom  from  state  interference  and  entanglement  with 
the  finances  of  the  government  than  that  of  most  other 
European  countries.  Belgium  began  her  present  national 
life  in  1830  with  the  assumption  of  but  a  small  debt  as  a 
legacy  from  her  relations  with  Holland  and  with  the  field 
comparatively  clear  for  the  adoption  of  a  sound  system  of 
currency  and  banking.  The  neutrality  of  Belgium  is  prac- 
tically guaranteed  by  the  great  powers  of  Europe  and  her 
military  expenditure  scarcely  exceeds  one  dollar  per  capita. 
The  National  Bank  of  Belgium  lias  been  employed  by  the 
government,  therefore,  simply  as  its  financial  agent  in  its 
ordinary  transactions  and  has  not  been  diverted  from  its 
duties  to  industry  and  commerce  by  the  necessity  of  floating 
large  loans  or  covering  deficits  in  the  public  finances.  The 
government  under  these  conditions  has  been  able  to  keep  in 
its  own  hands  the  ultimate  power  over  the  bank,  without 
being  often  tempted  to  abuse  it,  and  reserved  in  the  first 
charter  the  right  to  grant  to  other  corporations  the  power  to 
issue  notes.  The  National  Bank  has  a  monopoly  of  note 
issue  in  fact,  but  is  restrained  in  some  measure  from  abuse 
of  its  power  by  the  knowledge  that  a  competitor  may  at  any 
moment  be  legally  authorized  to  enter  the  field. 

250 


THE  BANKS  OF  NORTHERN  EUROPE.  25  I 

Monopoly  of  note  issue  has  existed  in  Belgium  only  since 
1850.  The  oldest  institution  issuing  bank-notes  was  the 
General  Society  for  the  Promotion  of  National  Industry  (So- 
ciete  G£n£rale  pour favoriser  V  Industrie  Nationale) .  This  so- 
ciety was  founded  in  1822  principally  as  a  bank  of  circulation 
and  discounts,  but  it  became  little  by  little  a  great  institution 
of  finance  interested  in  promoting  investments.1  The  soci- 
ety was  a  depository  of  public  funds  and  of  large  private 
savings,  loaned  money  on  mortgages,  on  public  securities, 
and  on  merchandise  and  was  interested  as  promoter  and  fi- 
nancial agent  in  nearly  all  the  large  enterprises  of  the  coun- 
try. It  had  no  strong  rival  until  after  the  separation  of 
Belgium  and  Holland  and  it  invited  rivalry  then  by  its  own 
shortsightedness.  The  society  and  its  management  were 
largely  under  Dutch  influence  and  when  the  new  govern- 
ment of  Belgium  sought  the  assistance  of  the  bank  as  a 
public  depositary  the  managers  refused  to  make  any  arrange- 
ments which  would  subject  them  to  the  public  accounting 
officers.  They  regarded  the  services  of  the  bank  as  indis- 
pensable and  forced  the  government  to  countenance  the 
creation  of  a  new  banking  institution  more  friendly  in  its 
character. 

The  Bank  of  Belgium  was  founded  February  24,  1835,  and 
the  management  of  the  public  funds  was  taken  away  from 
the  old  institution  and  given  to  the  new.  The  methods  of 
the  new  bank  had  the  same  defects  as  those  of  the  old,  how- 
ever, in  attempting  to  make  long  time  loans  on  commercial 
paper,  while  issuing  circulating  notes  payable  on  demand. 
The  result  was  a  crisis  in  1838,  when  confidence  was  im- 
paired by  the  fear  of  war  over  the  provinces  of  I,imbourg 
and  Luxembourg.  There  was  a  violent  contraction  of  credit 
at  Brussels,  and  the  Bank  of  Belgium  found  itself  without 
cash  to  meet  its  obligations.  The  older  institution,  which 
was  somewhat  stronger,  and  was  not  regarded  as  so  largely 
a  creature  of  the  existing  government,  took  advantage  of 
the  opportunity  to  crush  its  rival  and  on  December  4,  1838, 


1  Courcelle-Seneuil,  339. 


252          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

presented  1,000,000  francs  ($200,000)  to  the  Bank  of  Belgium 
for  redemption.  They  followed  this  up  on  December  loth, 
by  the  presentation  of  1,200,000  francs  and  on  December 
1 5th,  by  the  presentation  of  300,000  francs  more.  The  bank 
was  forced  to  suspend  and  to  appeal  to  the  government  for 
assistance.  A  loan  of  4,000,000  francs  ($800,000)  was  voted, 
of  which  2,600,000  francs  were  applied  to  the  payment  of 
bills  and  commercial  obligations  of  the  bank,  and  1,400,000 
francs  to  meeting  the  demands  of  depositors  in  the  savings 
branches  which  had  been  established. ' 

The  manner  in  which  the  existing  institutions  mixed  up 
the  business  of  banks  of  issue  and  deposit  with  that  of  op- 
erations for  long  terms  created  a  strong  feeling  in  favor  of 
a  bank  devoted  exclusively  to  commercial  banking.  The 
Bank  of  Belgium  was  again  embarrassed  in  1842  and  was 
compelled  to  surrender  the  privilege  of  keeping  the  public 
monies.  An  arrangement  was  entered  into  between  the 
Treasury  and  the  Societe  Generate,  but  that  institution  felt 
the  effect  of  the  crisis  of  1842  and  was  compelled  to  abandon 
all  the  branches  which  it  had  established  except  that  at  Ant- 
werp. The  government,  therefore,  in  view  of  the  necessity 
for  an  institution  of  a  different  character,  in  granting  a  re- 
newal of  the  charter  of  the  Socieie  Generate  for  twenty-five 
years,  in  1843,  reserved  the  right  to  revise  and  restrict  its 
powers  before  the  end  of  the  year  1849.  The  crisis  follow- 
ing the  political  excitement  of  1848  compelled  both  existing 
banks  to  suspend  specie  payments  and  afforded  the  govern- 
ment the  best  of  excuses  for  curtailing  their  privileges.  The 
banks  were  aided  for  the  moment  by  an  act  of  March  20, 
1848,  giving  forced  legal  tender  character  to  their  bills  but 
confining  the  issues  within  fixed  limits.  The  year  1849  had 
hardly  begun,  however,  when  the  President  of  the  Council 
of  Ministers,  M.  Frere-Orban,  brought  forward  a  plan  for 
the  National  Bank  of  Belgium  (Banque  Nationale  de  Bel- 
gique).  The  charter  of  the  bank  was  granted  by  the  law  of 
May  5,  1850,  fixing  the  capital  at  25,000,000  francs  ($5,000,- 


Noel,  I.,  549. 


THE  BANKS  OF  NORTHERN  EUROPE.  253 

ooo),  divided  into  shares  of  1,000  francs  each,  and  giving 
the  bank  its  franchise  for  twenty-five  years.  The  bank  was 
forbidden  to  borrow  or  make  loans  upon  mortgages,  or  upon 
deposits  of  industrial  stock,  and  was  forbidden  to  take  part 
directly  or  indirectly  in  industrial  enterprises.  The  admin- 
istration of  the  bank  was  intrusted  to  a  governor  appointed 
by  the  King  for  five  years  and  six  directors  chosen  by  the 
shareholders,  and  a  government  commissioner  was  charged 
with  the  supervision  of  discounts  and  the  issuing  of  bills. 

The  National  Bank  found  itself  face  to  face  with  strong 
competitors  in  the  two  older  banking  institutions,  but  grad- 
ually gained  in  strength  and  credit  up  to  1870,  when  it  was 
subjected  to  one  of  the  severest  tests  ever  put  upon  a  banking 
institution.  It  was  not  distrust  of  the  bank,  but  the  politi- 
cal events  accompanying  the  Franco-Prussian  War  which 
caused  the  stress.  The  demand  for  banking  accommodation 
was  greatly  increased  by  the  necessity  of  furnishing  supplies 
for  the  hostile  armies  and  many  business  transactions  were 
transferred  to  Belgium  which  would  ordinarily  have  been 
carried  on  in  France  or  Germany.  This  was  an  evidence  of 
confidence  in  the  bank  which  would  not  have  been  without 
its  benefits  if  the  institution  had  been  prepared  for  so  sudden 
an  enlargement  of  its  transactions,  but  this  indication  of  con- 
fidence from  without  was  offset  by  a  degree  of  distrust  at 
home  which  led  to  the  presentation  of  large  quantities  of 
bank  bills  for  redemption  in  coin.  The  government  added 
to  the  dangers  of  the  situation  by  a  policy  which  tended  to 
embarrass  the  bank  and  to  increase  the  uneasiness  of  the 
public. 

The  administration  feared  that  a  declaration  of  war  be- 
tween France  and  Germany  would  lead  to  the  violation  of 
the  neutrality  of  Belgium,  and  directed  the  National  Bank 
to  take  measures  to  transfer  the  metallic  reserve,  represent- 
ing the  balance  due  the  Treasury,  to  the  port  of  Antwerp. 
The  bank  was  informed  on  July  i3th  that  this  transfer  must 
be  effected  without  delay.  An  attempt  was  made  to  carry 
out  the  movement  secretly,  but  the  news  became  public  that 
the  metallic  reserve  had  been  removed  from  Brussels  and 


254          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

caused  great  popular  alarm.  The  government,  instead  of 
sustaining  the  bank,  issued  two  more  stupid  orders, — one  to 
the  agents  of  the  Finance  Department  in  the  provinces,  not 
to  permit  their  cash  to  be  exchanged  for  bank  bills,  and  the 
other  to  the  chiefs  of  the  military  forces,  to  exchange  bank 
bills  in  their  military  chests  for  coin.1  Notwithstanding 
this  apparent^  deliberate  effort  to  discredit  the  bank,  the 
government  refused  to  permit  the  suspension  of  specie  pay- 
ments and  held  the  institution  strictly  to  the  performance  of 
the  obligations  of  its  charter.  The  orders  regarding  the 
public  funds  and  the  military  chests  were  so  palpably  un- 
wise that  they  were  quickly  revoked,  and  an  order  was 
given  to  pay  everything  in  bank  bills  which  could  be  so 
paid,  and  to  exchange  large  bills  at  the  agencies  of  the 
banks  for  small  ones,  in  order  to  facilitate  payments  in 
bills. 

The  discounts  of  the  bank  increased  from  177,500,000 
francs  on  July  10,  1870,  to  203,923,100  francs  on  July  2oth, 
and  to  223,231,744  francs  on  July  3ist.  While  assistance 
was  thus  rendered  to  commercial  credit,  the  presentation  of 
notes  for  redemption  rose  from  a  daily  average  of  600,000 
francs  ($120,000)  during  1869  to  a  daily  average  of  over 
i, 000,000 francs  ($200,000)  during  the  eighty-two  days  from 
July  ist  to  September  20,  1870.  The  amount  presented  on 
July  20th  was  6,282,000  francs  ($1,250,000)  and  on  the  next 
day  7,025,000  francs  ($1,400,000),  and  the  daily  average  from 
July  i5th  to  July  3Oth  was  2,094,000  francs  ($415,000). 
The  bank  was  able  to  meet  these  demands  by  appeals  for 
loans  of  coin  from  London,  Amsterdam,  Hamburg,  and 
Paris,  and  by  realizing  the  bills  drawn  on  foreign  countries 
which  it  had  in  its  possession.2  These  bills,  which  amounted 


1  Noel,  I.,  486. 

*  The  large  holding  of  foreign  bills,  chiefly  drawn  on  London,  in 
the  cash  reserves  of  European  banks  is,  "to  a  very  large  extent, 
solely  for  the  sake  of  the  interest  which  is  to  be  made  on  them. 
Bills  on  Bngland,  owing  to  the  high  rate  of  interest  which  they  often 
bear,  as  compared  with  continental  rates,  are  a  favorite  investment 
abroad.  In  Paris,  Berlin,  Frankfort;  Hamburg,  and  other  conti- 


THE  BANKS  OF  NORTHERN  EUROPE.  255 

at  the  outbreak  of  the  crisis  to  64,144,561  francs,  were  re- 
duced on  July  3ist  to  7,227,333  francs.  The  proceeds  were 
employed  in  the  purchase  of  bullion,  principally  in  silver, 
which  the  mint  rapidly  coined  into  crowns.  The  bank  was 
thus  enabled  to  meet  every  demand  and  to  reduce  the  rate 
of  discount  as  soon  as  the  crisis  was  over.  The  rate  of 
July  I5th  was  two  and  a  half  per  cent.,  but  this  was  in- 
creased to  five  per  cent,  between  July  i5th  and  August  5th, 
and  to  six  per  cent,  from  August  5th  to  August  27th,  and 
even  to  seven  per  cent,  for  bills  drawn  in  foreign  countries 
on  Belgium.  The  27th  of  August  saw  the  worst  of  the 
crisis  over,  and  the  domestic  rate  fell  to  five  and  a  half  per 
cent.  ;  on  September  2Oth  to  four  and  a  half  per  cent.  ;  and 
on  October  8th  to  three  and  a  half  per  cent. 

Belgium  was  led  to  propose  the  formation  of  the  Latin 
Union  in  1865  because  of  the  difficulty  of  maintaining  the 
double  standard  under  the  oscillations  in  the  price  of  gold 
and  silver.  The  French  system  of  decimal  coinage  was 
adopted  by  the  law  of  June  5,  1832,  but  silver  was  made  the 
standard  and  no  provision  was  made  for  gold  coinage.  The 
creation  of  a  gold  circulation  in  France  after  the  great  gold 
discoveries  led  to  a  popular  demand  for  the  admission  of 
French  gold  coins  into  Belgium.  This  was  decreed  by  the 
law  of  June  4,  1861,  and  the  result  was  to  drive  the  silver 
five-franc  pieces  out  of  sight  and  change  the  standard  of 
actual  circulation  from  silver  to  gold.  The  National  Bank 
had  a  reserve  at  that  time  of  48,645,000  francs  in  silver  five- 
franc  pieces,  which  was  paid  out  to  meet  current  demands, 
but  this  fund  declined  by  November  8,  1862,  to  14,629,000 
francs,  and  the  bank  suspended  their  further  issue.1  The 
smaller  pieces  continued  to  disappear,  but  the  movement 
was  retarded  for  a  time  by  the  suspension  of  specie  pay- 


nental  cities,  the  bills  on  England  held  by  the  bankers  and  joint 
stock  companies  often  amount  to  many  millions  sterling  ;  and  a  very 
large  sum  remains  in  their  hands  for  several  months,— in  fact,  from 
the  time  when  the  bills  are  drawn  to  the  time  when  they  fall  due." — 
Goschen,  Foreign  Exchanges,  138. 
1  Shaw,  191. 


256          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

merits  in  the  United  States.  The  drain  set  in  again  in  1865, 
the  small  silver  pieces  became  so  scarce  that  they  could  not 
be  supplied  by  the  bank  in  sufficient  sums  to  meet  the 
demands  of  manufacturers,  and  the  government  was  com- 
pelled to  resort  to  the  coinage  of  nickel  pieces.  The  Bel- 
gian delegates  urged  the  adoption  of  the  gold  standard  at 
the  conference  which  resulted  in  the  formation  of  the  Latin 
Union,  but  consented  to  the  convention  finally  adopted  by 
the  other  powers. 

The  fall  in  the  value  of  silver  after  1867  dragged  Belgium 
into  new  difficulties,  against  which  the  convention  of  the 
Latin  Union  afforded  her  no  protection.  The  government 
was  authorized  by  the  law  of  December  18,  1873,  to  suspend 
the  minting  of  silver  five-franc  pieces,  which  had  been  going 
on  at  the  rate  of  300,000  francs  a  day.  The  coinage  of  sil- 
ver had  already  exceeded  domestic  needs,  and  great  quanti- 
ties drifted  across  the  French  frontier  and  found  their  way 
into  the  Bank  of  France.  This  circumstance  was  made 
the  occasion  of  a  demand  at  the  conference  of  1885  that  the 
countries  of  the  Union  take  back  their  national  coins  and 
pay  for  them  in  gold.  The  Belgian  delegate,  M.  Pirmez, 
at  first  refused  to  consider  any  such  proposition,  declared 
that  Belgium  was  being  made  the  victim  of  the  misfortunes 
of  the  Union,  and  absented  himself  from  the  sittings  of  the 
conference.  He  declared  that  the  treaty  of  1865  made  no 
reference  to  any  such  process  of  liquidation  ;  that  the  ac- 
ceptance of  Belgian  coins  by  French  citizens  had  not  been 
a  part  of  the  treaty,  but  a  result  of  voluntary  action  ;  and 
that  the  dissolution  of  the  treaty  wrould  simply  relieve 
public  depositaries  from  further  acceptance  of  foreign  coins, 
without  imposing  any  obligations  upon  their  issuers  to  re- 
deem them.1  The  fear  that  the  collapse  of  the  Latin  Union 
would  imperil  the  gold  standard  in  Belgium  finally  pre- 
vailed, however,  over  other  arguments,  and  Belgium  con- 
sented to  a  basis  of  liquidation  by  which  each  country  was 
to  pay  in  gold  for  one-half  of  its  five-franc  pieces  returned 


1  Ansiaux,  14. 


THE  BANKS  OF  NORTHERN  EUROPE.  257 

to  it  and  was  allowed  to  leave  the  other  half  to  be  returned 
by  the  play  of  foreign  exchange.1 

The  position  of  Belgium  and  of  the  National  Bank  will 
be  peculiarly  embarrassing  if  the  dissolution  of  the  L,atin 
Union  destroys  the  legal  status  of  the  silver  coins  of  one 
country  in  Jhe  others.  Belgian  coins  would  under  such 
circumstances  flow  rapidly  back  into  Belgium  and  would  be 
likely  to  glut  the  reserves  of  the  bank  and  make  difficult 
the  maintenance  of  the  gold  standard.  The  metallic  reserve 
of  the  bank  averages  about  100,000,000  francs,  of  which 
only  a  fourth  is  now  in  silver,  but  the  volume  of  Belgian 
five-franc  pieces  outstanding  is  estimated  at  400,000,000 
francs,  of  which  about  200,000,000  are  in  the  Bank  of 
France,  besides  those  in  active  circulation  in  France.3  A 
glut  of  silver  in  Belgium  would  have  the  tendency  to  draw 
gold  from  the  National  Bank,  while  there  would  be  the 
strongest  disposition  in  the  bank  to  retain  gold  and  force 
silver  into  circulation.  It  would  put  a  severe  test  upon  the 
credit  of  the  bank  and  its  460,000,000  francs  of  paper  circu- 
lation to  attempt  to  enforce  the  policy  of  the  Bank  of  France, 
to  redeem  in  silver  at  discretion,  and  the  pressure  for  gold 
for  export  would  be  strong  because  of  the  redundancy  of 
the  monetary  circulation  which  the  glut  of  silver  would 
cause.  The  heroic  policy  of  buying  gold  and  selling  silver 
for  what  it  will  bring  in  the  bullion  market  is  favored  by 
some  Belgian  statesmen  and  may  prove  the  only  effective 
means  of  maintaining  the  gold  standard. 

The  present  charter  of  the  National  Bank  of  Belgium  was 
granted  in  1872,  when  the  life  of  the  bank  was  extended  to 


1  M.  Haupt  considers  France  rather  than  Belgium  the  victim  in 
this  transaction  and  regrets  that  her  delegates,  after  securing  the 
consent  of  the  delegates  of  Italy,  Switzerland,  and  Greece  to  liquida- 
tion in  full  in  gold,  yielded  to  their  demand  that  they  have  the  same 
privilege  as  Belgium  of  liquidating  in  gold  to  the  extent  of  only  one- 
half  their  silver  coins  accumulating  in  French  hands. — The  Monetary 
Question  in  1802,  90. 
*  Haupt,  93. 


258 


HISTORY  OF  MODERN  BANKS  OF  ISSUE. 


January  i,  1903,  and  the  capital  was  increased  to  50,0x30,000 
francs  ($10,000,000).  Several  changes  were  made  in  the 
previous  laws  regarding  taxation,  the  handling  of  the  public 
funds,  and  the  share  of  the  government  in  the  profits  of  the 
bank.  Greater  precision  was  introduced  into  the  provi- 
sions regarding  the  proportion  of  specie  held,  which  is  now 
required  to  be  one-third  of  the  notes  in  circulation  and  of 
other  demand  liabilities.  This  reserve  may  be  trenched 
upon  in  emergencies  with  the  consent  of  the  Minister  of 
Finance.  The  notes  of  the  bank  were  made  a  legal  tender 
by  the  law  of  June  20,  1873,  but  only  so  long  as  they  are 
redeemed  in  coin  on  demand  and  are  receivable  in  public 
depositaries.  Their  acceptance  by  public  depositaries  is 
defined  by  law,  but  may  be  suspended  by  the  Minister  of 
Finance.1  A  portion  of  the  public  funds  in  the  custody  of 
the  bank  is  allowed  to  be  loaned,  but  the  profits  earned  go 
to  the  credit  of  the  Treasury.  The  government  levies  a 
patent  tax  on  the  gross  volume  of  business  of  the  bank,  a 
stamp  tax  on  the  notes,  and  a  tax  of  one-fourth  of  one  per 
cent,  on  the  circulation  above  275,000,000  francs  ;  and  also 
receives  the  product  of  discounts  at  rates  above  five  per 
cent,  to  the  amount  of  the  excess,  and  one-fourth  of  the 
net  profits  of  the  bank  in  excess  of  six  per  cent.a  The 
leading  items  of  the  accounts  of  the  bank  since  its  founda- 
tion are  shown,  in  francs,  in  the  following  table  : 


DEC.  3lSt. 

CIRCULATION. 

METALLIC  RE- 
SERVE. 

DISCOUNTS. 

DEPOSITS. 

1851 

50,346,210 

29,264,880 

44,034,953 

25,980,830 

1860 

117,899,960 

63.023,535 

155.958,745 

81,825,144 

1870 

202,528,520 

95,614,523 

196,233,878 

81,319,921 

1880 

339,969,5io 

98,787,206 

283,992,826 

72,142,896 

1890 

404,721,600 

103,413,340 

3I2,67O,66l 

67,723,  92f 

1892 

427,594,580 

114,654,737 

309,391,705 

69,340,318 

1894 

469,662,000 

130,756,515 

346,590,227 

78,558,169 

1895 

461,850,000 

103,325,000 

397,850,000 

74,300,000 

1  Noel,  I.  526. 


2  Noel,  I.  563. 


THE  BANKS  OF  NORTHERN  EUROPE.  259 

The  Bank  of  The  Netherlands. 

The  existing  Bank  of  the  Netherlands  is  the  successor  of  the 
Bank  of  Amsterdam,  one  of  the  most  famous  of  the  banks  of 
the  Middle  Ages.  The  Bank  of  Amsterdam  was  not  a  bank  of 
issue  in  the  modern  sense,  but  proposed  originally  to  deliver 
receipts  for  deposits  of  coin.  The  bank  was  founded  by  an 
ordinance  of  the  City  of  Amsterdam  of  January  31,  1609, 
and  was  called  the  Exchange  Bank  {Amsterdamschc  Wissel- 
bank}.  Much  confusion  and  many  disputes  had  arisen  in 
the  city  because  of  the  variety  of  coins  in  circulation  and 
their  departure  from  the  proper  standard.  Money  of  full 
weight  rose  to  a  premium  with  the  exchange  brokers  and 
the  fact  was  considered  as  the  result  rather  than  the  cause 
of  their  operations.  The  city  undertook  by  a  statute  of  July 
15,  1608,  to  prohibit  the  holding  of  deposits  or  the  transfer 
of  money  by  any  one  except  the  owners  or  their  personal 
agents.  The  use  of  bills  of  exchange  was  forbidden  and 
traders  were  directed  to  make  no  discrimination  between 
light  and  heavy  coins  nor  to  give  or  take  money  at  a  higher 
rate  than  that  fixed  by  the  States-General. 

These  provisions  were  only  intended  to  clear  the  ground 
for  the  establishment  of  the  new  bank  under  government 
control.  All  bills  of  exchange  were  required  to  be  paid 
through  the  bank,  and  the  institution  wras  required  to  sell 
any  kind  of  specie  demanded  of  it  at  as  low  a  premium  as 
possible.  The  transferable  deposits  or  credits  came  to  be 
known  as  ' '  bank  money  "  and  bore  this  designation  through- 
out the  history  of  the  bank.  The  creation  of  a  means  of 
exchange  of  fixed  and  uniform  value  did  much  to  promote 
the  great  commerce  of  which  Amsterdam  was  becoming  the 
centre.  The  bank  accepted  deposits  only  at  their  bullion 
value  and  granted  credit  for  the  amount  in  lawful  money, 
subject  to  a  proper  charge  for  handling.  Deposits  were 
necessarily  subject  to  charges,  because  the  bank  was  sup- 
posed to  keep  in  its  vaults  every  guilder  received  and  to  do 
no  loan  and  discount  business.  Payments  in  Amsterdam 
came  to  be  made  universally  in  bank  money,  by  the  pre- 


260          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

sentation  of  a  transfer  order  at  the  bank  by  the  payer  or  his 
authorized  agent,  which  entitled  the  payee  to  the  credit  on 
the  next  day.  The  bank  became  so  general  a  medium  of 
payments  in  Amsterdam  that  the  most  extravagant  estimates 
were  formed  of  the  gold  and  silver  stored  in  its  vaults. 
Some  put  the  amount  as  high  as  900,000,000  gulden  ($360,- 
000,000)  but  the  more  modest  and  accurate  estimate  of 
Adam  Smith  was  33,000,000  gulden  ($13, 500,000). l 

Direct  redemption  of  bank  credits  in  coin  gradually  fell 
into  disuse,  partly  because  bank  money  was  so  much  pref- 
erable to  coin  for  nearly  all  practical  purposes  and  partly  be- 
cause of  the  acceptance  of  foreign  coins  on  special  deposits. 
The  system  of  advances  upon  such  deposits  was  formally 
put  in  operation  in  January,  1683,  and  the  bank  issued  a  re- 
ceipt to  the  depositor  for  the  bullion  value  of  the  deposit, 
certifying  his  right  to  withdraw  it  upon  returning  the  bank 
money  writh  which  he  had  been  credited  and  paying  one- 
eighth  of  one  per  cent,  interest.  The  right  of  withdrawal 
was  forfeited  if  the  charges  were  not  paid  and  the  deposit 
renewed  within  six  months.  It  was  necessary,  therefore,  in 
order  to  withdraw  coin  thus  deposited,  to  have  both  the  re- 
ceipt and  the  equivalent  amount  of  bank  money.  The  bank 
money  outstanding  was  in  excess  of  the  legal  coin  in  the 
custody  of  the  bank,  but  not  in  excess  of  the  domestic  and 
foreign  coin  and  bullion.  The  lapsing  of  receipts  protected 
the  bank,  therefore,  from  demands  for  coin  redemption  which 
it  could  not  meet,  while  another  method  was  adopted  to  pre- 
vent the  excess  of  the  bank  money  in  circulation  and  to  pro- 
vide bullion  for  those  who  desired  it  for  export. 

The  method  adopted  by  the  bank  for  controling  the  vol- 
ume of  circulation  and  maintaining  its  credit  was  the  sale  of 
bank  money  for  specie  or  specie  for  bank  money  in  such 
amounts  as  the  public  might  require.  Regular  agents  of  the 
bank  were  charged  with  these  transactions  and  kept  the  pre- 
mium on  bank  money  within  narrow  limits  and  its  value 
substantially  unchanged.  It  was  supposed  until  the  last 


1  Wealth  of  Nations,  II.  61. 


THE  BANKS  OF  NORTHERN  EUROPE.  26 1 

half  of  the  eighteenth  century  that  the  bank  had  sacredly 
fulfilled  its  obligations  to  keep  in  the  vaults  the  exact  amount 
of  coin  and  bullion  represented  by  the  bank  money  outstand- 
ing. The  affairs  of  the  bank  were  kept  secret  by  the  small 
committee  of  the  city  government  which  was  charged  with 
its  administration,  and  it  was  not  generally  known  that  as 
early  as  1657  individuals  had  been  permitted  to  overdraw 
their  accounts  and  that  in  later  years  enormous  loans  of 
specie  had  been  made  to  the  Dutch  East  India  Company. 
The  truth  became  public  property  in  the  winter  of  1789  and 
1790.  The  premium  on  bank  money,  which  was  usually 
kept  above  four  per  cent.,  then  fell  below  two  per  cent, 
and  in  August,  1790,  disappeared.  The  bank  failed  to  pro- 
tect its  credit  by  purchasing  bank  money  on  an  adequate 
scale  and  it  was  represented  that  large  purchases  would  be 
followed  by  a  heavy  export  of  bullion  to  the  injury  of  com- 
merce. The  possibility  of  deception  came  to  an  end  when 
on  November,  12,  1790,  a  notice  was  issued  that  silver  would 
be  sold  to  the  holders  of  bank  money  at  a  rate  equivalent  to 
ninety  per  cent,  of  their  claims.  It  was  substantially  an  ad- 
mission of  insolvency  and  the  debt  was  assumed  in  1791  by 
the  government  of  the  City  of  Amsterdam.  The  effort  was 
made  to  put  the  bank  again  on  its  feet,  but  the  time  for  such 
banks  had  passed,  the  position  of  Amsterdam  as  a  commercial 
centre  had  changed,  the  bank  was  closed  by  a  royal  decree 
of  December  19,  1819,  and  the  small  amount  of  bank  money 
outstanding  was  soon  after  paid  off.1 

The  Bank  of  the  Netherlands  (de  Nederlandsche  Bank}  was 
authorized  by  the  government  in  1814,  after  it  became  evi- 
dent that  the  Bank  of  Amsterdam  could  not  be  revived. 
The  privilege  of  the  bank  was  twice  renewed  for  twenty-five 
years,  carrying  its  charter  to  March  31,  1889.  The  last  re- 
newal was  nominally  only  for  fifteen  years,  until  March  31, 

1  A  summary  of  the  result  of  the  researches  of  the  latest  scholar- 
ship regarding  the  Bank  of  Amsterdam,  based  in  part  upon  the  his- 
tory of  the  bank  by  W.  C.  Mees,  formerly  president  of  the  Bank  of 
the  Netherlands,  is  presented  by  Prof.  Dunbar  in  his  valuable  work 
on  The  Theory  and  History  of  Banking,  82-105. 


262          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

1904,  but  a  further  renewal  for  ten  years  will  be  tacitly  as- 
sumed unless  the  abrogation  of  the  privilege  is  decreed  by 
the  State.1  The  law  of  December  22,  1863,  left  open  the 
possibility  of  establishing  other  banks  of  issue  by  special 
law,  but  the  Bank  of  the  Netherlands  has  been  in  fact  the 
only  bank  of  issue  in  Holland  since  its  establishment.  The 
capital  of  the  bank  was  originally  5,000,000  florins  ($2,000,- 
ooo)  and  has  been  increased  from  time  to  time  to  10,000,000, 
15,000,000,  and  16,000,000  florins  ($6,400,000).  The  bank 
is  not  a  public  institution,  but  the  State  subscribed  in  1863 
for  one  thousand  shares  at  115,  which  were  sold  on  June 
i,  1864,  at  190.  The  government  exercises  a  supervision 
over  the  affairs  of  the  bank  through  a  special  commis- 
sioner paid  by  the  bank,  and  the  president  and  secretary  are 
named  by  the  King.  The  Treasury  does  not  share  directly 
in  the  profits  of  the  bank,  but  collects  an  impost  in  the  na- 
ture of  a  patent  tax  proportional  to  the  dividend  distributed. 
Five  per  cent,  dividends  are  provided  for  the  shareholders, 
which  are  to  be  made  up  from  the  reserve  fund  in  case  of  in- 
sufficiency of  the  profits.  The  bank  performs  gratuitously 
the  duties  of  agent  of  the  Treasury  at  Amsterdam  and  in- 
cludes the  Treasury  resources  in  its  deposit  accounts.2  It  is 
limited  to  the  usual  operations  of  a  bank  of  issue,  discount, 
and  deposit  and  is  forbidden  to  take  part  in  any  commercial 
or  industrial  enterprise  or  to  make  advances  upon  real  estate. 
There  is  no  fixed  limit  upon  the  note  issues  of  the  Bank 
of  the  Netherlands,  but  the  decree  of  August  16,  1884,  fixed 
the  proportion  of  the  metallic  reserve  at  forty  per  cent,  of 
the  aggregate  of  notes  and  deposits.  The  law  imposes  no 
restrictions  on  the  proportion  of  gold  and  silver,  but  since 
1872  the  bank  has  ceased  to  buy  silver  and  has  added  as 
much  as  possible  to  its  gold.  Holland  suspended  the  free 
coinage  of  silver  in  December,  1877,  and  has  maintained  her 
monetary  system  at  parity  with  gold  by  treating  the  silver 
coins  as  tokens,  redeemable  in  gold.  The  Bank  of  the 

1  L£vy,  194. 

a  Alfred  Neymarck,  Article  "  Banque,"  in  Didionnaire  d' Economic 
Politique,  I.,  144. 


THE  BANKS  OF  NORTHERN  EUROPE.  263 

Netherlands  held  42,996,000  florins  in  gold  on  December  28, 
1895,  and  82,164,000  florins  in  silver.  The  principal  office 
of  the  bank  is  at  Amsterdam.  There  is  a  branch  at  Rotter- 
dam, and  there  are  thirteen  agencies  and  correspondents  of 
three  different  classes  in  fifty-six  other  localities.  The  cir- 
culation of  the  bank  has  gradually  increased  from  a  mean 
of  104,859,994  florins  in  1865,  to  131,656,347  florins  in  1870, 
175,340,677  florins  in  1875,  and  203,600,000  florins  ($82,000,- 
ooo)  in  1895.  The  issue  of  notes  below  ten  florins  ($4)  is 
prohibited. 

The  monetary  system  maintained  by  the  Bank  of  the 
Netherlands  is  of  peculiar  interest,  because  of  the  demonstra- 
tion which  it  affords  that,  within  narrow  limits  at  least,  it 
is  possible  to  maintain  the  gold  standard  with  very  little 
gold  and  while  the  money  of  circulation  is  chiefly  of  silver 
and  paper.  The  bank  pursues  a  policy  directly  opposite 
from  that  of  the  Bank  of  France,  by  furnishing  gold  freely 
for  export  and  sparingly  for  domestic  circulation.  The  pur- 
pose of  this  policy  is  to  maintain  the  parity  of  foreign  ex- 
change, because  of  the  conviction  that  a  refusal  to  furnish 
gold  for  export  would  put  the  metal  at  a  premium  and  pre- 
cipitate the  country  upon  a  silver  basis.  This  danger  was  a 
serious  one  in  1883.  The  g°ld  reserve,  which  had  been  at 
56,924,000  florins  at  the  close  of  1880,  declined  in  October, 

1882,  to  11,306,638  florins  and  in  February,  1883,  to  5,365,- 
091  florins  ($2,150,000).     A  bill  was  promptly  introduced  in 
the  States-General,   authorizing   the  melting  of  25,000,000 
florins  in  old  pieces  of  two  and  a  half  florins  and  their  sale 
as  bullion,  in  order  to  obtain  gold.     The  bill  did  not  become 
law  until  March  4,  1884,  but  the  exchanges  in  the  meantime 
became  favorable  and  the  stock  of  gold  rose  on  April  21, 

1883,  to   31,000,000  florins  ($12,400,000).     The   bank  now 
stands  ready  to  furnish  gold  for  export  or  to  furnish  silver  at 
its  bullion  value,  while  the  old  stock  of  large  silver  coins  is 
being  gradually  reduced  by  subsidiary  coinage  for  Holland 
and  Java.1 


1  Bimetallism  in  Europe,  Sen.  Ex.  Doc.  34,  soth  Cong.,  ist  Sess.,  33. 


264          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

The  Banks  of  Sweden  and  Norway. 

The  three  countries  of  the  Scandinavian  Union, — Sweden, 
Norway  and  Denmark, — have  a  uniform  monetary  system 
based  upon  the  gold  standard  with  the  crown  as  the  unit, 
worth  twenty-six  and  eight-tenths  cents  ($0.268)  in  United 
States  money,  but  each  country  has  a  banking  system  of  its 
own.  The  State  Bank  of  Sweden  (Sveriges-RiksbanK)  was 
founded  November  30,  1656,  and  to  Palmstruch,  its  founder, 
is  attributed  the  first  use  of  bank  bills  as  credit  money,  not 
fully  covered  by  the  coin  reserve.  The  bank  became  a  pub- 
lic institution  in  1668,  and  its  capital  is  furnished  by  the 
nation,  but  the  administration  is  under  the  charge  of  a  com- 
mission chosen  by  the  Diet  and  is  not  responsible  to  the 
executive  department  of  the  government.  The  capital  of 
the  bank  is  25,000,000  crowns  ($6,700,000)  with  a  reserve  of 
5,000,000  crowns,  and  it  is  allowed  to  issue  notes  to  the 
amount  of  both,  plus  its  credits  with  foreign  banks  and  its 
metallic  reserve.1  The  reserve  is  not  allowed  to  fall  below 
10,000,000  crowns.  The  notes  are  a  legal  tender  by  the 
Swedish  constitution  in  Sweden  and  are  receivable  by  public 
depositaries,  and  in  these  respects  have  an  advantage  over 
the  notes  issued  by  the  private  banks  of  issue. 

The  private  banks  number  twenty-seven  and  may  be  estab- 
lished by  royal  authority.  The  original  legislation  on  the 
subject  (January  14,.  1824)  required  the  number  of  share- 
holders in  each  bank  to  be  not  less  than  thirty.  A  new  law 
of  January  i,  1887,  imposed  certain  general  conditions  upon 
the  private  banks,  which  are  still  in  force.2  The  capital  of 
each  is  required  to  be  at  least  1,000,000  crowns  ($268,000), 
the  charter  runs  for  ten  years,  and  the  shareholders  are  no 
longer  responsible  except  for  the  amount  of  their  shares. 
The  circulation  is  limited  to  the  aggregate  of  the  capital 
invested  in  securities,  the  reserve  similarly  invested,  half 
the  total  of  credits  of  the  bank,  and  the  coin  reserve,  after 
the  deduction  of  an  amount  equal  to  ten  per  cent,  of  the 

1  Muhleman,  74. 

2  Levy,  219. 


THE  BANKS  OF  NORTHERN  EUROPE.  26$ 

capital.  These  banks  are  required  to  redeem  their  notes  in 
gold  upon  demand  and  are  not  authorized  to  substitute  bills 
of  the  State  Bank.  Five  of  the  banks  have  branches  at 
Stockholm,  where  they  exchange  their  bills  for  those  of  the 
Bank  of  Sweden,  which  can  be  turned  into  gold  upon 
demand. 

The  note  circulation  of  Sweden  under  this  system  of 
comparatively  free  banking  has  been  kept  within  prudent 
limits  and  the  notes  circulate  at  par  with  coin.  The  circula- 
tion of  the  Bank  of  Sweden  on  August  i,  1895,  was  about 
54,000,000  crowns  and  of  the  private  banks  64,000,000  crowns 
(making  a  total  of  $30,000,000).  The  metallic  reserve  of 
the  Bank  of  Sweden  was  31,000,000  crowns  and  of  the 
private  banks  20,000,000  crowns.  The  Bank  of  Sweden 
carries  about  27,000,000  crowns  of  this  amount  in  gold,  but 
the  private  banks  have  only  8,500,000  crowns  in  gold.  The 
discounts  of  the  Bank  of  Sweden  were  35,500,000  crowns, 
advances  55,000,000  crowns,  and  current  accounts  38,500,000 
crowns.  The  discounts  of  the  private  banks  were  180,000,000 
crowns,  advances  155,000,000  crowns,  and  current  accounts 
400,000,000  crowns.  The  Bank  of  Sweden,  in  spite  of  its 
public  ownership,  is  not  deeply  involved  with  the  obligations 
of  the  government,  but  is  the  depositary  of  the  public  funds 
and  makes  an  annual  advance,  by  vote  of  the  Diet,  of  about 
1,600,000  crowns  to  facilitate  the  operations  of  the  Treasury.1 

The  Bank  of  Norway  {Norges  Bank)  was  founded  June 
14,  1816,  with  its  head  office  at  Drontheim  and  branches  in 
leading  towns  of  the  province.  Its  capital  was  raised  by 
a  tax  upon  landed  property  and  the  land-holders  became 
shareholders  in  the  bank  according  to  their  respective  pay- 
ments. The  original  capital  of  the  bank  was  2,000,000 
specie  dollars  and  circulation  was  issued  provisionally  in  the 
proportion  of  five  dollars  to  two  dollars  of  the  capital.  One 
of  the  purposes  of  the  foundation  of  the  bank  was  the  im- 
provement of  agriculture,  and  the  discount  of  commercial 


1  Neymarck,  Article  "  Banque,"  in  Dictionnaire  d*  Economic  Poli- 
tique,  I.,  144. 


266          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

bills  was  at  first  only  a  secondary  consideration.  Loans 
were  made  by  means  of  note  issues  upon  land  to  an  amount 
not  exceeding  two-thirds  of  the  valuation,  and  the  borrower 
made  a  semi-annual  payment,  including  not  only  interest, 
but  five  per  cent,  annually  of  the  principal,  which  was  thus 
liquidated  in  twenty  years,  like  some  modern  mortgage  loans. 
The  attempt  to  float  a  paper  currency  upon  land  values 
resulted  in  failure  and  the  notes  of  the  bank  in  1822  could 
be  exchanged  at  Hamburg  at  the  rate  of  only  $187.50  for 
$100  in  silver.  The  Storthing  was  compelled  to  pass  a  law 
reducing  the  value  of  the  notes  by  providing  that  190  in 
paper  should  be  redeemed  in  the  proportion  of  100  in  silver.1 
The  value  of  the  notes  gradually  rose  and  the  bank  was  put 
upon  a  sounder  basis.  The  present  capital  is  10,000,000 
crowns  and  the  note  issues  are  limited  to  twice  the  reserve, 
of  which  one-third  may  consist  of  deposits  with  foreign 
banks.  The  notes  are  legal  tender  in  Norway  and  consti- 
tute the  only  credit  paper  of  general  circulation.  The  gov- 
erning board  of  the  bank  is  named  by  the  Storthing  and 
consists  of  fifteen  representatives.  The  actual  administra- 
tion is  entrusted  to  five  directors  at  the  central  bank  and 
three  at  each  branch,  who  are  also  named  by  the  Storthing. 
The  State  is  a  large  shareholder,  but  the  management  of  the 
bank  is  kept  independent  of  the  Treasury.2  The  circulation 
on  August  i,  1895,  was  about  60,000,000  crowns  ($15,000,- 
ooo),  the  metallic  reserve  30,000,000  crowns,  discounts  34,- 
000,000  crowns,  advances  20,000,000  crowns,  and  current 
accounts  9,000,000  crowns. 

The  National  Danish  Bank. 

The  National  Danish  Bank  was  found  in  1818  and  has  a 
capital  of  26,752,400  crowns  ($7,ooo,ooo).8  The  bank  was 
the  successor  of  the  State  Bank  {Rigsbankeri),  which  had 
been  created  by  the  government  in  1813  to  restore  order  to 

1  Macleod,  Theory  and  Practice  of  Banking,  II.,  263-64. 

-  Statistique  Internationale  des  Banques  d*  Emission  :  Norvege,  6-7. 

3  Levy,  218. 


THE  BANKS  OF  NORTHERN  EUROPE.  267 

the  demoralized  financial  system  of  the  country.  A  decree 
of  July  4,  1818,  transferred  the  privileges  of  the  old  bank  to 
the  new  for  a  term  of  ninety  years.  The  government  is 
free  at  the  end  of  this  period,  in  1908,  to  extend  the  privileges 
or  revoke  them.  The  capital  of  the  National  Bank  is  in 
private  hands,  but  it  was  collected  by  an  enforced  levy  upon 
real  estate,  and  the  land  owners  became  shareholders  in  the 
bank  for  the  amount  of  the  tax  paid.  The  bank  assumed 
the  obligations  of  the  State  Bank  and  was  unable  to  pay 
dividends  until  1845.  The  dividends  since  that  time  have 
averaged  about  seven  per  cent.  The  note  circulation  has 
no  fixed  limit,  but  is  subject  to  conditions  as  to  the  amount 
of  reserve  held.  A  decree  of  1873  fixed  the  limit  of  circu- 
lation not  fully  covered  by  specie  at  27,000,000  crowns,  but 
this  was  increased  by  a  decree  of  November  5,  1877,  to 
30,000,000  crowns.  The  metallic  reserve  is  not  permitted 
in  any  case  to  fall  below  three-eighths  of  the  face  value  of 
the  notes,  and  at  least  12,000,000  crowns  must  be  in  gold 
coin  or  in  bullion  which  has  been  actually  delivered  to  the 
mint  for  coinage.  The  other  portions  of  the  metallic  reserve 
may  be  in  gold  bars  or  foreign  gold  coin  and  in  foreign  silver 
to  an  amount  not  greater  than  one-third  of  the  entire  fund.1 
Redemption  of  notes  is  required  in  gold  coin  on  demand. 
The  notes  are  legal  tender  and  are  the  only  credit  paper  in 
use  as  currency  in  the  Kingdom.  The  circulation  on  July 
31,  1895,  was  about  83,000,000  crowns  ($21,000,000)  ;  specie 
reserve,  60,000,000  crowns  ;  discounts,  20,000,000  crowns  ; 
current  accounts,  19,800,000  crowns;  advances,  35,000,000 
crowns. 


1  Comptrollers  Report,  1805,  Report  of  Minister  John  E.  Risley, 

77- 


CHAPTER  XII. 

THE  BANKS  OF  SOUTHERN  EUROPE. 

Development  of  Banking  in  Switzerland— The  Proposed  Bank  of  the 
Swiss  Confederation — The  Bank  of  Spain  and  its  Entanglements 
with  the  Treasury — Similar  Situation  of  the  Bank  of  Portugal — 
The  Greek  Banks  and  the  Effects  of  Specie  Suspension— The 
Ottoman  Bank — The  Banks  of  Roumania,  Bulgaria,  and  Servia. 

BANKING  in  Switzerland  had  its  earliest  development 
at  Basle  and  Geneva,  which  were  long  noted  for  the 
skill  and  wealth  of  their  bankers,  but  banks  of  issue 
were  not  established  in  either  city  until  1845.  The  first 
Swiss  bank  of  issue  was  established  at  St.  Gall  in  1836. 
The  cantonal  bank  of  Vaud  and  the  Bank  of  Basle  were 
established  in  1845,  tne  Bank  of  Commerce  at  Geneva  in 
1846,  and  the  Bank  of  Geneva  in  1848.  The  incorporation 
of  banks  of  issue  rapidly  spread  among  those  cantons  which 
contained  a  considerable  number  of  merchants,  and  in  1863 
eighteen  banks  had  been  established,  with  forty-two  agencies 
or  branches.  The  aggregate  circulation  of  these  banks  on 
December  31,  1862,  was  18,468,122  francs  ($3,600,000),  the 
cash  reserve  was  19,380,922  francs  and  the  current  accounts, 
representing  deposits,  49, 166,405  francs  (^Soo.ooo).1  Eleven 
of  these  eighteen  banks  were  established  with  the  help  of  the 
cantonal  governments  and  the  remainder  were  established  by 
private  funds. 

The  Swiss  banks  preserved  until  1875  a  purely  local  exist- 
ence and  their  operations  and  circulation  rarely  extended 
beyond  the  limits  of  the  canton  in  which  they  were  estab- 

1  Courcelle-Seneuil,  350. 

268 


THE  BANKS  OF  SOUTHERN  EUROPE.  269 

lished,  but  the  growing  needs  of  commerce  invited  co-opera- 
tion and  the  extension  of  banking  facilities.  Some  of  the 
banks  began  to  extend  their  branches  into  other  cantons 
and  others  made  conventions  with  each  other  for  the  mutual 
acceptance  of  their  bills.  It  was  at  this  stage  in  the  devel- 
opment of  Swiss  banking  that  the  Federal  constitution  was 
revised  and  authority  to  legislate  regarding  banks  confided 
to  the  Federal  government.  Protection  against  monopoly 
was  afforded  by  the  provision  of  the  constitution  that  Federal 
legislation  * '  shall  not  establish  a  monopoly  of  the  issue  of 
bank  bills  nor  decree  their  obligatory  acceptance."  The 
law  of  1875  required  the  Swiss  banks  to  maintain  a  cash 
reserve  equal  to  forty  per  cent,  of  their  notes  in  circula- 
tion and  forbade  any  one  bank  to  issue  circulation  in  excess 
of  12,000,000  francs  ($2,400,000).  Each  bank  was  required 
to  accept  the  notes  of  other  banks  and  to  redeem  them  in 
coin.  The  number  of  banks  at  the  end  of  1873  was  twenty- 
eight  and  their  circulation  was  47, 606,000  francs  ($9,400,000), 
against  which  there  was  a  cash  reserve  of  14,892,796  francs. 
The  Act  of  1875  was  superseded  by  that  of  March  8,  1881, 
which  limited  the  circulation  to  double  the  paid-up  and 
unimpaired  capital  (capital  vers£  et  reellement  existanf}  of  the 
banks  and  required  banks  of  issue  to  have  a  capital  of  at 
least  500,000  francs.  The  requirement  of  a  forty  per  cent, 
cash  reserve  was  maintained,  to  be  distinct  and  independent 
of  the  other  reserves  of  the  bank  and  kept  in  a  separate 
account.  The  remainder  of  the  circulation  was  required  to 
be  fully  covered  by  the  deposit  of  securities  or  commercial 
bills.  Weekly,  monthly,  and  annual  reports  are  required 
according  to  a  form  prescribed  by  the  Federal  Council  and 
an  annual  examination  is  made  under  public  authority.1 
The  notes  are  issued  through  the  Federal  inspectorate,  are 
delivered  to  the  banks  as  they  need  them,  and  are  of  a  uni- 
form type.  A  bank  which  renounces  its  circulation  is  required 
to  redeem  the  notes  for  a  certain  time,  to  surrender  the 
redeemed  notes  to  the  Federal  authorities  and  after  the 

1  Alfred  Neymarck,  Article,  "  Banque,"  in  Dictionnaire  d>  Economic 
Politique,  L,  145. 


2/0          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

expiration  of  the  period  fixed  for  redemption  to  pay  into  the 
Federal  Treasury  an  amount  of  coin  equal  to  the  face  value 
of  the  notes  still  outstanding.  The  government  then  assumes 
the  obligation  of  redemption  for  thirty  years,  after  which 
the  balance  goes  to  a  public  fund.  The  Federal  tax  on  cir- 
culation is  one  per  cent,  a  year  and  the  cantons  are  allowed 
to  tax  the  average  circulation  of  banks  which  are  situated 
within  their  limits.1 

The  Swiss  banking  system  as  embodied  in  the  law  of  1881 
is  a  system  of  free  banking  under  government  supervision. 
The  Federal  Assembly  reserved  the  right  to  fix  the  aggre- 
gate of  the  Swiss  circulation  and  to  apportion  it  among  the 
banks,  but  this  right  has  been  exercised  only  for  the  purpose 
of  compelling  the  banks  to  conform  to  certain  uniform 
requirements.  Among  these  requirements,  besides  those 
already  defined,  are  redemption  of  their  notes  in  coin  on 
demand  and  the  acceptance  at  par  of  the  notes  of  other 
specie-paying  Swiss  banks.  The  government  in  no  way 
guarantees  the  circulation,  except  where  the  canton  may  be 
the  owner  of  the  bank,  and  the  notes  are  not  a  legal  tender 
in  private  contracts.2  Twenty-six  of  the  Swiss  banks  entered 
into  a  clearing  arrangement  by  authority  of  a  law  of  June  19, 
1882,  for  the  mutual  exchange  of  notes.  These  banks  are 
known  as  "The  Associated  Banks"  {Banques  Concorda- 
taires),  and  their  notes  circulate  throughout  Switzerland 
and  are  received  by  public  depositaries. .  The  entire  number 
of  banks  of  issue  in  Switzerland  is  thirty-four,  of  which  five 
operate  under  Articles  15  and  16  of  the  banking  law.  These 
articles  permit  the  issue  of  notes  against  different  forms  of 
security  from  those  required  of  the  other  banks,  but  do  not 
dispense  with  the  forty  per  cent,  coin  reserve. 

The  aggregate  liabilities  of  the  thirty-four  Swiss  banks  on 
December  31,  1895,  were  1,258,027,831  francs  ($243,000,000), 
of  which  196,200,000  francs  was  on  account  of  circulation  ; 
168,459,131  francs  for  current  accounts  and  other  short  term 
obligatons  ;  649, 132,940  francs  for  obligations  at  fixed  terms  ; 

1  Comptroller's  Report,  1895,  Letter  of  Minister  Brodhead,  104. 

2  Levy,  216. 


THE  BANKS  OF  SOUTHERN  EUROPE. 

147,025,000  francs  for  paid-up  capital ;  27,483,163  francs  for 
reserve  fund  ;  and  the  remainder  for  foreign  bills,  acceptances, 
and  unpaid  capital.  The  item  of  term  obligations  included 
223,223,661  francs  of  savings  bank  deposits  and  389,137,822 
francs  of  deposit  bonds  and  similar  obligations.  The  assets 
included  77,339,580  francs  in  the  legal  specie  reserve  held 
against  circulation  ;  16,003,595,  francs  "  free  "  specie;  164,- 
469,138  francs  in  domestic  and  13,672,207  francs  in  foreign 
bills  of  exchange  ;  428,975,764  francs  in  advances  ;  and  145,- 
019,723  francs  in  public  securities.  The  mean  effective  cir- 
culation outside  the  banks  was  167,913,000  francs  in  1895, 
against  158,719,000  francs  in  1894.  The  maximum  in  1895 
was  185,146,000  francs  in  the  week  of  November  9th  and  the 
minimum  was  154,264,000  in  the  week  of  February  23d.  The 
total  cash  reserve  attained  a  mean  during  1895  of  93,649,000 
francs,  of  which  71,688,000  francs  represented  the  forty  per 
cent,  reserve.  The  mean  gold  holdings  were  82,667,000 
francs  and  the  mean  silver  10,982,000  francs.  The  gold  in 
1894  was  77,190,000  and  the  silver  15,302,000  francs.  The 
maximum  cash  reserve  in  1895  was  98,417,000  francs  in  the 
week  of  January  26th  and  the  minimum  90,461,000  francs  in 
the  week  of  October  5th. 

The  passion  for  a  great  state  bank  seized  upon  Swiss 
statesmen  after  the  crisis  of  1891  and  an  amendment  was 
adopted  to  the  constitution  remitting  to  the  Federal  Council 
control  of  note  issues.1  The  Chambers  decided  in  favor  of 
a  state  bank  rather  than  a  private  joint  stock  bank, 
and  the  Department  of -Finance  presented  a  project  of 
law  for  the  bank  in  the  summer  of  1894,'  which  yet 
remains  to  be  put  in  operation.  The  first  article  declares 
the  principal  functions  of  the  new  bank  to  be  to  serve  ' '  as 
the  regulator  of  the  money  market  and  to  facilitate  exchange 
operations."  The  principal  seat  is  to  be  at  Berne,  but  every 
canton  has  the  right  to  demand  the  establishment  of  a  branch 

1  The  popular  vote  on  the  amendment  was  228,853  i° the  affirmative 
and  143, 939  in  the  negative.  The  amendment  forbids  forced  legal  tender 
except  in  time  of  war  and  exempts  the  bank  from  cantonal  taxation. 

2  Raffalovich,   Le  Marche  Financier  en  1894-5,  167. 


2/2          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

or  agency  within  its  own  territory.  The  name  of  the  new 
institution  is  to  be  "  The  Bank  of  the  Swiss  Confederation," 
the  capital  is  to  be  furnished  by  an  issue  of  bonds  and  the 
Confederation  makes  itself  responsible  for  the  engagements 
of  the  bank  in  case  its  own  means  prove  insufficient.  The 
capital  is  fixed  at  25,000,000  francs  ($5,000,000),  but  may  be 
increased  to  50,000,000  francs  by  vote  of  the  Federal  As- 
sembly. "  The  exclusive  right  to  issue  bank  bills  "  is  con- 
ferred on  the  new  institution  and  the  existing  banks  are 
required  to  retire  their  circulation  within  two  years  and  a 
half  from  the  date  when  the  new  bank  begins  operations,  by 
surrendering  to  the  central  bank  quarterly  one-tenth  of  the 
notes  outstanding  at  that  date.  Deficiencies  in  the  quota  of 
notes  must  be  made  up  in  specie,  to  be  held  as  a  redemption 
fund  for  the  retirement  of  the  notes.1 

No  fixed  limit  is  put  upon  the  note  issues  of  the  new 
bank,  but  it  is  required  to  hold  gold  coin  or  bullion  or  legal 
silver  coins  to  the  amount  of  one-third  of  the  circulation. 
This  plan  was  not  entirely  satisfactory  to  the  commercial 
interests  of  the  country,  and  final  action  has  not  yet  been 
taken.  A  revised  project  of  law  passed  the  National  Coun- 
cil in  the  summer  of  1896,  by  a  vote  of  89  to  43,  and  passed 
the  Council  of  the  States  by  a  vote  of  27  to  17.  The  Union 
of  Commerce  and  Industry,  however,  representing  the  com- 
mercial interests,  met  at  Zurich  on  August  15,  1896,  and 
voted,  20  to  2,  after  three  hours  of  discussion,  to  disapprove 
the  proposition  of  the  government.  The  Union  is  in  favor 
of  a  central  bank,  but  is  opposed  to  government  owner- 
ship. 

Banking  in  Spain. 

Spain  had  banks  of  deposit  during  her  period  of  prosperity 
in  the  Middle  Ages,  some  of  which,  like  that  at  Barcelona,2 


^Bulletin  de  Statistique,  November,  1894,  XXXVI.,  533-39. 

'This  bank,  founded  in  1401,  is  said  to  have  been  the  first  bank  of 
deposit  instituted  for  the  accommodation  of  private  merchants. — Hal- 
lam,  II.,  530. 


THE  BANKS  OF  SOUTHERN  EUROPE.  2?$ 

attained  considerable  celebrity.  These  institutions  disap- 
peared with  the  decadence  of  Spanish  commerce  and  it  re- 
mained for  the  modern  age  to  witness  a  new  development 
of  banking.  An  attempt  was  made  in  th  ^  eighteenth  century 
to  establish  institutions  of  credit,  and  the  Bank  of  San  Carlos, 
which  was  founded  in  1782  at  Madrid,  was  still  in  operation 
when  the  monopoly  of  the  issue  of  circulating  notes  was 
given  to  the  Bank  of  Spain  in  1874.  The  Bank  of  Spain 
was  founded  in  1829,  under  the  name  of  the  Bank  of  San 
Fernando,  but  did  not  enjoy  any  special  privileges  outside 
of  Madrid  and  the  places  where  it  had  branches  until  1856.' 
It  was  at  first  a  government  bank  and  its  name  was  changed 
at  the  time  of  the  new  legislation  to  the  Bank  of  Spain,  but 
even  after  1856  the  right  to  incorporate  other  banks  of  issue 
remained  in  the  hands  of  the  government.  Such  banks  had 
been  established  prior  to  1856  by  the  consent  of  the  public 
authorities  in  much  the  same  manner  as  departmental  banks 
might  have  been  established  in  France  before  1840. 

The  legislation  of  January  8,  1856,  was  simply  a  first 
step  in  the  direction  of  monopoly,  like  the  similar  legislation 
of  France  and  Germany.  This  law  prescribed  that  there 
should  be  not  more  than  one  bank  of  issue  in  any  commercial 
city.  The  general  provisions  regarding  the  new  banks 
limited  their  issues  to  three  times  their  capital,  obliged  them 
to  keep  a  coin  reserve  of  at  least  one-third  of  their  circulation, 
and  fixed  the  minimum  denomination  of  the  notes  at  one 
hundred  reals  ($5).  The  liberality  of  these  provisions  was 
impaired  by  leaving  to  the  government  the  nomination  of 
the  governor  of  the  Bank  of  Spain  and  of  royal  commissioners 
to  manage  the  independent  banks.  The  Bank  of  Spain 
had  created  up  to  1863  only  two  branches,  at  Valencia  and 
at  Alicanta,  and  there  were  independent  banks  at  Cadiz, 
Barcelona,  Seville,  Malaga,  Corunna,  Santander,  and  Val- 
lodolid.  The  capital  of  the  independent  banks  was  not 
large,  but  in  this  respect  it  was  commensurate  with  the  vol- 
ume of  business  in  Spain.  The  Bank  of  Spain  on  December 


Courcelle-Seneuil,  361. 


274         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

31,  1862,  showed  a  circulation  of  208,380,901  reals  ($10,400,- 
ooo),  a  coin  reserve  of  107,398,201  reals,  deposits  of  235,063,- 
731  reals,  and  a  commercial  portfolio  of  309,231,378  reals 
($15,500,000). 

The  charter  of  the  Bank  of  Spain  was  extended  in  1856 
for  twenty-five  years  and  was  renewed  in  1874  for  thirty 
years.  The  law  of  March  19,  1874,  conferred  upon  the  bank 
the  exclusive  privilege  of  issuing  notes  and  increased  the 
capital  from  132,000,000  reals  ($6,600,000)  to  100,000,000 
pesetas  ($2o,ooo,ooo).x  All  the  existing  provincial  banks, 
then  numbering  eighteen,  were  ordered  to  liquidate  their 
circulation  and  transfer  it  to  the  Bank  of  Spain.  The  bank 
is  not  a  state  institution  and  the  state  does  not  participate  in 
its  profits,  but  it  had  the  authority,  under  the  law  of  1874,  to 
require  advances  by  the  bank  to  the  amount  of  125,000,000 
pesetas  ($25,000,000)  upon  the  deposit  of  proper  guarantees. 
The  notes  of  the  bank  were  made  legal  tender  and  limited 
to  five  times  the  capital.  The  capital  was  increased  soon 
after  the  Act  of  1874  to  150,000,000  pesetas  ($30,000,000), 
which  carried  the  limit  of  circulation  to  750,000,000  pesetas 
($i50,ooo,ooo).a 

The  necessities  of  the  Treasury  led  to  a  new  revision  of 
the  charter  by  the  law  of  July  14,  1891,  and  the  extension 
of  the  privilege  of  the  bank  until  December  31,  1921.  The 
new  charter  authorizes  the  issue  of  notes  to  the  amount  of 
1,500,000,000  pesetas  ($300,000,000)  against  a  cash  reserve 
of  one-third,  of  which  at  least  half  is  required  to  be  kept  in 
gold.8  The  bank  was  required  to  pay  for  these  privileges 
by  advancing  50,000,000  pesetas  to  the  government  annually 
for  three  years  without  interest  or  right  to  reimbursement 
until  the  expiration  of  the  charter.  The  fate  of  the  bank 
has  come  to  be  bound  up  more  and  more  with  that  of  the 
State  and  it  has  been  only  by  the  bank's  help  that  the  Treas- 

1  The  present  Spanish  coinage  system   follows  that  of  the  Latin 
Union,  the  peseta  being  the  equivalent  of  the  franc  ($0.193). 

2  Alfred  Neymarck,  Article,  "  Banque,"  in   Dictionnaire  &  Econo- 
mic Politique,  L,  140. 

3  Bulletin  de  Statistique,  July,  1891,  XXX.,  72. 


THE  BANKS   OF  SOUTHERN  EUROPE.  2/5 

ury  has  been  able  to  meet  its  engagements.  The  Treasury 
budget  has  shown  a  persistent  deficit  and  a  floating  debt  was 
incurred  from  1885  to  1893  °f  333> 000,000  pesetas  ($66,000,- 
ooo).  The  permanent  debt  on  June  30,  1892,  was  6,249,639,- 
975  pesetas  ($i, 200,000,000V  and  the  charges  on  account  of 
the  debt  for  1894  were  estimated  at  309, 2 19, 669  pesetas  ($61,- 
000,000  or  about  $3.40  per  capita).  Kxchange  has  declined 
about  20  per  cent,  and  railway  securities  and  public  stocks 
have  fallen  from  15  to  75  percent,  during  the  past  five  years. 
The  commercial  operations  of  the  bank  through  its  fifty- 
eight  branches  have  become  subordinate  to  the  issue  of  paper 
notes  to  cover  the  advances  to  the  state.  A  large  proportion 
of  the  assets  are  locked  up  in  government  and  foreign  secu- 
rities, which  increased  rapidly  for  several  years  because  the 
bank  maintained  a  uniform  interest  rate  of  four  per  cent., 
which  afforded  a  profit  upon  the  difference  between  this  rate 
and  the  higher  rate  earned  by  the  securities.2  This  differ- 
ence was  availed  of  by  shrewd  speculators  to  borrow  on 
securities,  spend  the  loan  on  new  purchases  of  securities, 
deposit  them  again  as  guarantee  for  a  larger  loan,  and  so 
on  without  limit.  The  rate  was  raised  in  January,  1892, 
to  five  per  cent.,  but  without  entirely  curing  the  difficulty. 
The  cash  reserve,  moreover,  is  only  available  for  the  re- 
demption of  notes  to  about  half  of  its  face  value.  The  gold 
in  the  reserve  on  December  31,  1895,  was  200,100,000  pesetas 
and  the  silver  275,550,000  pesetas.  Gold  is  at  a  premium 
of  20  per  cent,  above  bank-notes  so  that  redemption  in  gold 
would  immediately  drain  the  bank.  Redemptions  are  actu- 
ally made  in  silver,  whose  present  commercial  value  is  below 
that  of  the  bank  paper.  The  Spanish  peseta  is  the  equiva- 
lent of  the  French  franc,  but  five  pesetas  are  required  to 
obtain  four  francs,  because  of  the  greater  stability  of  the 
French  currency  under  the  policy  of  restricted  silver  coinage 
and  the  fact  that  the  franc  is  received  as  a  token  coin  in  the 
countries  of  the  Latin  Union  at  par  with  gold.  The  recent 


1  Raffalovich,  Le  Marche  Financier  en  1893-4,  217. 

2  Raffalovich,  Le  Marche  Financier  en  1891,  119. 


276 


HISTORY  OF  MODERN  BANKS  OF  ISSUE. 


insurrection  in  Cuba  has  required  new  appeals  by  the  gov- 
ernment to  the  bank  and  the  circulation  had  been  expanded 
on  September  30,  1895,  to  961,900,000  pesetas.  The  follow- 
ing table  shows  the  principal  items  of  the  accounts  of  the 
bank  since  it  acquired  the  monopoly  of  circulation  : 


DEC.  3ISt. 

CIRCULATION. 

CASH 
RESERVE. 

COMMERCIAL 
BILLS. 

ADVANCES. 

CURRENT 
ACCOUNTS. 

(In  millions  of  pesetas.) 

1875 

127.7 

I29.I 

I5-I 

4I.O 

87.1 

1880 

246.8 

2OO.6 

24.2 

II0.8 

192.4 

1885 

469.0 

272.2 

74.4 

188.3 

234.1 

iSgO 

734.1 

233.2 

180.4 

251-3 

401.6 

1893 

934-0 

375-0 

342.7 

135.1 

374-3 

1894 

909.6 

475-6 

280.7 

106.5 

306.6 

1895 

987.0 

475-1 

356.4 

~—  ~— 

384.7 

The  Bank  of  Portugal. 

Portugal  has  a  single  public  bank  of  issue  with  a  capital 
of  13,500,000  milreis  ($14,500,000).  The  statutes  of  the 
bank  originally  imposed  careful  restrictions  on  the  circula- 
tion, but  these  restrictions  have  been  suspended  in  order  to 
permit  large  loans  to  the  government  which  have  tended  to 
drag  the  circulation  of  the  bank  into  the  same  mire  of  de- 
preciation as  the  Bank  of  Spain.  Article  15  of  the  original 
law  prescribed  that  the  circulation  should  always  be  covered 
by  a  metallic  reserve  and  negotiable  paper  maturing  in  not 
more  than  three  months  and  that  the  metallic  reserve  should 
be  in  gold  and  should  equal  one-third  the  aggregate  of  the 
circulation  and  other  demand  liabilities.  Article  16  fixed 
the  power  of  note  issue  at  double  the  capital  of  the  bank  and 
Article  37  limited  to  2,000,000  milreis  the  advances  to  the 
State. '  Both  the  latter  limitations  have  been  disregarded  and 
the  circulation  is  now  four  times  the  capital  and  advances  to 
the  government  are  more  than  ten  times  the  amount  fixed 
by  law. 

The  last  extension  of  the  charter  continued  the  bank  for 
forty  years,  from  1888  to  1928,  and  conferred  upon  it  the 
208. 


THE  BANKS  OF  SOUTHERN  EUROPE.  2JJ 

monopoly  of  the  issue  of  legal  tender  notes  in  the  realm  of 
Portugal  and  the  neighboring  islands.  Seven  other  banks, 
five  at  Oporto,  one  at  Braga,  and  one  at  Guimaraes,  had  the 
power  to  issue  notes  for  circulation  within  their  respective 
districts,  which  were  not  received  by  public  depositaries. 
An  arrangement  of  July  8,  1891,  authorized  the  Bank  of 
Portugal  to  unify  the  circulation  and  substitute  its  own  notes 
for  those  of  the  other  banks.  The  bank  is  managed  by  a 
governor  appointed  by  the  Treasury  for  three  years  and  a 
board  of  ten  directors  chosen  by  the  shareholders.  The  ac- 
counts of  the  bank  on  September  30,  1895,  showed  a  note 
circulation  of  55,000,000  milreis  ($5 9, 000,000),  protected  by 
a  specie  reserve  of  12,400,000  milreis,  of  which  only  4,850,- 
ooo  milreis  ($5,250,000)  was  in  gold  and  7,550,000  milreis 
($8,150,000)  in  silver.  The  commercial  portfolio  amounted 
to  11,300,000  milreis  and  the  current  accounts  to  1,300,000 
milreis. 

The  Banks  of  Greece. 

Greece  has  three  banks  of  issue, — the  National  Bank  of 
Greece,  founded  in  1842  ;  the  Ionian  Bank,  founded  in  1839  ; 
and  the  Epiro-Thessalian  Bank.  The  capital  of  the  Na- 
tional Bank  is  20,000,000  drachmas.  The  Ionian  Bank  has 
its  head  office  in  London  and  its  paid-up  capital  is  ,£315,507, 
or  7,887,687  drachmas.1  All  three  banks  have  been  dragged 
into  the  channel  of  forced  legal  tender  and  depreciated  money 
by  the  enormous  debts  of  the  government  and  the  steadily 
growing  embarrassments  of  the  public  Treasury.  A  law  of 
June  20,  1877,  gave  forced  legal  tender  quality  for  the  first 
time  in  recent  years  to  the  notes  of  the  National  Bank  to  a 
limit  of  47,000,000  drachmas  ($9,071,000)  and  to  those  of  the 
Ionian  Bank  to  a  limit  of  12,000,000  drachmas  ($2,316,000). 
The  money  was  restored  to  par  in  1884  at  a  heavy  expense 


1  The  coinage  systems  of  Greece,  Roumania,  Bulgaria,  and  Servia 
are  each  based  upon  the  French  decimal  system  and  their  monetary 
unit  in  gold,  though  having  different  names,  is  equivalent  to  the 
franc,  which  is  valued  by  the  United  States  Mint  at  nineteen  and 
three-tenths  cents(|o.i93.) 


278          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

to  the  Treasury,  but  the  suspension  of  specie  payments  was 
thought  necessary  again  in  October,  1885,  and  authority  to 
issue  inconvertible  notes  was  extended  to  the  Epiro-Thes- 
salian  Bank  as  well  as  to  the  other  two  banks.  The  Na- 
tional Bank  was  authorized  to  issue  notes  of  which  one- third 
should  be  covered  by  coin  and  bullion,  one-third  by  commer- 
cial paper,  and  one-third  by  securities.  The  government 
borrowed  from  the  bank  14,000,000  drachmas  in  gold  and 
required  it  to  hold  notes  subject  to  its  orders  to  the  amount 
of  70,000,000  drachmas.  The  bank  was  given  in  return  for 
these  advances  the  right  to  circulate  60,000,000  drachmas 
on  its  own  account  in  inconvertible  paper.  The  Ionian 
Bank  was  authorized  to  maintain  a  circulation  of  7,000,000 
drachmas,  of  which  2,000,000  should  be  on  account  of  the 
government,  and  the  Hpiro-Thessalian  Bank  was  given  a 
maximum  circulation  of  5,000,000  drachms,  of  which  800,- 
ooo  should  be  on  government  account.  The  National  Bank 
was  also  authorized  to  circulate  7,000,000  drachmas  in  small 
notes,  and  each  of  the  other  banks  was  authorized  to  issue 
3,500,000  drachmas  in  such  notes.  The  metallic  reserve  of 
the  National  Bank  has  been  reduced  below  2,000,000  drach- 
mas ($400,000)  and  while  gold  sometimes  reaches  the  coun- 
try after  the  sale  of  the  crops  it  quickly  flies  abroad  again  or 
disappears  into  private  hoards.  The  price  of  gold  in  paper 
was  122  in  1889  and  1890,  140  in  1892,  180  in  1893,  an(^  2O° 
in  1894.' 

The  population  of  Greece  is  about  2,300,000,  and  the  an- 
nual budget  for  carrying  on  the  government  averages  about 
100,000,000  drachmas  ($20,000,000),  of  which  35,000,000 
drachmas  is  on  account  of  interest  on  the  debt.  This  in- 
terest has  not  been  paid  for  several  years  in  gold,  as  required 
by  the  contract,  but  desultory  efforts  have  been  made  to  per- 
suade the  holders  of  the  securities  to  accept  new  securities  in 
payment  of  interest  or  to  permit  a  complete  readjustment  of 
Greek  finances.  The  British  holders  of  Greek  securities 
persuaded  the  London  Foreign  Office  in  1892  to  send  Major 


1  Raffalovich,  Le  Marche  Financier  en  1893-4, 


THE  BANKS  OF  SOUTHERN  EUROPE.  279 

Law  to  Athens  to  study  the  actual  condition  of  affairs  and  to 
determine  whether  the  government  would  be  able  to  meet  its 
obligations.  Major  Law  made  a  report  to  the  British  minis- 
ter at  Athens  under  date  of  March  10,  1893,  recommending 
various  reforms  in  the  financial  system.  He  showed  that  the 
aggregate  public  debt  on  January  i,  1893,  was  about  750,- 
000,000  drachmas  ($150,000,000  or  about  $60  per  head). 
Greece  imports  more  than  she  exports  and  the  accumulated 
deficits  in  the  annual  budgets  since  1877,  due  to  the  premium 
on  gold  and  the  inefficient  methods  of  collecting  the  rev- 
enues, have  been  674,000,000  drachmas. 

Major  Law's  recommendations  were  not  adopted  and  no 
definite  plan  has  yet  been  perfected  for  the  restoration  of 
order  to  Greek  finance.  The  King,  in  his  speech  from  the 
throne  on  November  8,  1893,  afforded  striking  evidence  of 
the  depreciation  of  the  bank-notes  and  the  evils  which  have 
come  in  its  train.  It  was  announced  that  all  the  subsidiary 
coins,  even  to  those  of  bronze,  had  disappeared  and  the  gov- 
ernment recommended  the  coinage  at  Paris  of  nickel  pieces 
of  five,  ten,  and  twenty  centimes  to  supply  the  people  with 
small  change.  A  law  was  approved  December  i,  1893,'  Pro~ 
viding  for  the  payment  of  50  per  cent,  of  the  interest  then 
overdue  on  the  public  debt  in  bank-bills,  for  future  payments 
in  the  proportion  of  30  per  cent,  in  gold,  and  for  covering 
directly  into  the  Treasury  certain  funds  which  had  been 
pledged  as  the  guarantee  of  particular  loans.  This  legisla- 
tion led  to  protests  by  the  European  bond-holders  and 
several  abortive  efforts  to  readjust  the  debt.  Meanwhile, 
values  in  Greece  have  shrunk  225,000,000  drachmas,  the 
gold  drachma  has  risen  to  200  per  cent,  in  paper,  high  prices 
and  an  excess  of  paper  circulation  have  failed  to  stimulate 
exports,  and  raisins,  the  principal  article  of  export,  have 
been  shut  from  France  and  their  export  to  the  United  States 
has  been  reduced  by  the  high  tariffs  which  those  countries 
have  established.2 

1  The  Greeks  still  adhere  to  the  Julian  calendar.     The  actual  date  by 
the  Gregorian  calendar,  in  use  in  Western  Europe,  was  December  I3th. 

2  Raffalovich,  Le  Marcht  Financier  en  i '894-95 '»  282-84. 


280          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

One  of  the  essential  defects  of  the  Greek  banking  system 
is  the  large  proportion  of  assets  required  to  be  locked  up  in 
mortgages.  The  law  requires  three-fourths  of  the  capital 
of  the  National  Bank  and  three-fourths  of  the  capital  and 
reserve  funds  of  the  Kpiro-Thessalian  Bank  to  be  thus  in- 
vested. The  English  bank  is  free  from  these  restrictions. 
The  government  is  not  a  shareholder  in  either  of  the  banks, 
but  appoints  a  royal  commissioner  to  supervise  the  opera- 
tions of  each  and  requires  the  publication  of  periodical 
reports.  The  banks  pay  a  tax  of  five  per  cent,  on  their 
dividends  and  the  customary  house- tax,  and  transfer  public 
monies  free  of  charge.1  The  shareholders  are  liable  only 
for  the  amount  of  their  investment.  The  National  Bank 
has  twenty-six  branches  and  the  others  have  several  each. 

The  manner  in  which  the  resources  of  the  National  Bank 
have  been  absorbed  by  the  government  and  by  mortgage 
investments  is  indicated  in  a  striking  manner  by  the  bal- 
ance sheet  for  October  i,  1895.  The  total  liabilities  were 
247,253,095  drachmas  (about  $47,700,000  in  nominal  gold 
value,  but  about  half  this  amount  in  silver  or  paper). 
These  liabilities  comprized  106,252,864  drachmas  in  circulat- 
ing notes,  7,000,000  drachmas  in  small  notes,  94,727,724 
drachmas  in  deposits  and  current  accounts,  11,500,000 
drachmas  on  account  of  reserve  fund,  and  the  remainder  on 
account  of  capital  and  other  smaller  items.  The  resources 
for  meeting  this  mass  of  liability  included  1,852,396  drachmas 
in  cash,  2,965,500  drachmas  in  the  notes  of  other  banks, 
8,938,462  drachmas  in  foreign  credits,  10,430,598  drachmas 
in  advances  to  the  government,  38,487,457  drachmas  in  gov- 
ernment bonds,  28,435,445  drachmas  in  sundry  loans  to 
public  bodies,  38,818,548  drachmas  in  advances  on  first 
mortgages,  77,787,754  drachmas  on  forced  currency  and  notes 
of  one  and  two  drachmas,  and  only  12,091,897  drachmas, — 
or  about  one-twentieth  part  of  the  assets, — in  unmatured 
commercial  bills. 

The  condition  of  the  Ionian  Bank  more  nearly  conforms 


1  Letter  of  Minister  E.  Alexander,  Comptroller's  Report,  1895,  84. 


THE  BANKS  OF  SOUTHERN  EUROPE.  28 1 

to  sound  banking  principles.  The  total  liabilities  on  Sep- 
tember i,  1895,  were  33, 763, 979  drachmas,  of  which  7,887,687 
drachmas  was  on  account  of  capital,  8,566,061  drachmas 
was  for  circulation,  3,495,298  drachmas  for  small  notes, 
3,831,876  drachmas  for  current  accounts,  and  8,150,292 
drachmas  for  interest-bearing  deposits.  The  assets  included 
402,578  drachmas  in  cash  on  hand,  230,874  drachmas  cash 
in  London,  1,362,822  drachmas  in  notes  of  other  banks, 
3,670,668  drachmas  in  investments  in  London,  5,412,908 
drachmas  in  commercial  bills,  10,463,647  drachmas  advanced 
on  securities  and  mortgages,  3,894,280  drachmas  in  loans  to 
the  government  on  forced  currency,  and  3,499,999  drachmas 
in  loans  on  small  notes. 

The  Imperial  Ottoman  Bank. 

The  Imperial  Ottoman  Bank  at  Constantinople  received 
the  exclusive  privilege  of  note  issue  in  Turkey  when  it  was 
founded  in  1863.  The  capital  was  furnished  by  British  and 
French  capitalists  and  was  originally  ,£2, 700,000.  This  was 
increased  in  1865  to  ,£4,050,000  and  in  August,  1874,  by  the 
absorption  of  the  Austro-Ottoman  Bank,  to  ;£  10,000,000,  of 
which  half  has  been  paid  up.1  The  first  charter  was  for 
thirty  years,  but  a  new  convention  of  February  17,  1875, 
prolonged  the  privileges  of  the  bank  for  an  additional  period 
of  twenty  years,  until  1913.  The  bank  is  required  to  main- 
tain a  cash  reserve  equal  to  one-third  of  its  circulating  notes 
and  these  notes  must  be  paid  in  coin  to  the  bearer  on  pres- 
entation. They  are  a  legal  tender  in  the  districts  in  which 
they  are  issued  and  where  the  branches  of  the  bank  are 
established.  The  government  is  pledged  by  the  charter  to 
issue  no  paper  money  during  the  continuance  of  the  bank 
and  to  authorize  the  creation  of  no  other  bank  or  establish- 
ment with  like  privileges.  The  notes  of  the  bank  are 
receivable  at  public  depositaries  and  a  large  part  of  its  func- 
tions relate  to  its  duties  as  financial  agent  of  the  Turkish 
government.  A  new  convention  was  concluded  with  the 

1  Revue  des  Banques,  May,  1895,  XIV.,  100. 


282          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

government  for  a  period  of  six  years  in  1893,  f°r  the  purpose 
of  regulating  the  advances  by  the  bank  to  the  Treasury. 
The  maintenance  of  a  floating  debt  is  a  necessary  feature 
of  the  present  methods  of  taxation  in  Turkey,  as  most  of 
the  revenue  is  obtained  by  a  levy  upon  the  land  and  crops 
and  is  not  paid  until  after  the  crops  are  harvested.1  The 
advances  to  the  government  are  largely  reimbursed  when 
the  taxes  are  collected.  The  total  advances  on  January  i. 
1895,  were  ,£1, 358, 927. 

The  Turkish  people  have  not  yet  become  large  users  of 
bank-notes  and  are  easily  excited  to  distrust.  This  happened 
in  the  summer  of  1894,  when  some  forged  notes  were  found 
in  circulation  and  the  public  presented  ,£218,000  for  redemp- 
tion within  a  week.  The  circulation  at  the  head  office, 
which  was  ,£249,000  during  the  first  week  in  June,  fell  to 
,£66,000  during  the  first  week  of  July.  The  circulation  of 
the  bank  was  as  high  as  ,£990,000  in  1893,  but  was  only 
,£838,797  at  the  close  of  1894.  The  experience  of  this  run 
taught  the  management  the  importance  of  maintaining  a 
strong  coin  reserve  and  prepared  them  for  the  run  which  set 
in  during  the  political  disturbances  growing  out  of  the  Ar- 
menian massacres  in  the  autumn  of  1895.  The  government 
offered  the  bank  the  privilege  of  suspending  specie  payments 
for  thirty  days,  but  the  offer  was  declined  and  ,£1,300,000  in 
gold  was  obtained  early  in  November  from  the  Bank  of 
France.  The  Imperial  government  were  so  pleased  with  the 
spirit  shown  by  the  bank  that  the  charter  was  extended  for 
twelve  years,  until  1925. 2  The  cash  in  hand  at  Constanti- 
nople and  the  branches  was  ,£1,746,905  on  January  i,  1895, 
and  ,£1, 907, ooo  on  July  31,  1895.  The  bank  also  held  Eng- 
lish and  French  government  securities  on  January  i,  1895, 
to  the  amount  of  ,£1,510,007. 

The  bank  has  been  extending  its  branches  of  late  years  and 
has  been  finding  them  more  profitable  as  their  convenience 
to  commerce  has  come  to  be  understood.  Branches  exist  at 


1  L£vy,  227. 

2  London  Bankers'  Magazine,  Dec.,  1895,  LX.,  726. 


THE  BANKS  OF  SOUTHERN  EUROPE.  283 

Smyrna,  Bagdad,  Aleppo,  and  Alexandria,  and  those  at 
Smyrna  and  Bagdad  showed  a  material  increase  of  business 
during  1893  and  1894.  The  number  of  branches  rose  from 
fourteen  in  1883  to  twenty-eight  in  1894,  aud  an  encouraging 
feature  of  this  development  has  been  the  fact  that  increased 
advances  of  capital  by  the  parent  bank  have  not  been  required 
at  the  branches  in  proportion  to  the  increasing  volume  of  busi- 
ness, but  the  capital  has  been  furnished  by  the  communities.1 
The  growth  of  deposits  has  also  been  an  encouraging  feature 
of  the  history  of  the  bank,  the  amount  having  increased  from 
about  ;£8, 000,000  of  all  classes  in  1893  *°  £$-> 55^, 469  in 
current  accounts  and  ,£1,427,196  for  fixed  terms  on  January 
i,  1895.  The  private  securities  held,  representing  the  com- 
mercial portfolio,  were  ,£3,492,847  ;  the  advances  on  securi- 
ties were  ,£4,920,796  ;  and  the  current  accounts  of  sundries 
were  ,£4,679,364.  Business  conditions  were  not  favorable 
in  Turkey  during  1894,  but  some  conversions  of  the  public 
debt  and  other  large  financial  transactions  enabled  the  bank 
to  show  net  profits  of  ,£457,840  and  to  pay  a  dividend  of 
eight  per  cent. 

The  Banks  of  Roumania,  Bulgaria,  and  Servia. 

The  National  Bank  of  Roumania  was  founded  in  1880 
with  the  exclusive  privilege  of  issuing  notes  payable  to 
bearer  until  December  31,  1912.  The  capital  is  30,000,000 
lei  ($6,000,000)  of  which  12,000,000  lei  have  been  paid  in. 
A  third  of  the  capital  is  furnished  by  the  government  and 
the  other  two-thirds  by  individuals.  A  metallic  reserve  of 
at  least  one-third  of  the  note  issues  is  required  and  no  bill 
can  be  issued  below  twenty  lei  ($4).  The  entire  circulation 
must  be  covered  by  securities  which  are  readily  negotiable, 
but  thirty  per  cent,  of  the  metallic  reserve  may  be  represented 
by  foreign  bills  of  exchange.9  The  circulation  on  Sep- 

1  London  Bankers'  Magazine,  Aug.  1895,  LX.,  252. 

3  Iv£vy,  225.  The  gold  standard  was  adopted  in  Roumania  by  the  law 
of  March  2,  1890.  The  unit  in  the  three  Slavic  countries  is  the  equiv- 
alent of  the  French  franc  ($0.193). 


284          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

tember  30,  1895,  was  139,900,000  lei  ($27,000,000),  the  gold 
reserve  was  63,700,000  lei,  and  the  foreign  drafts  were  9,700,- 
ooo  lei.  The  domestic  discounts  were  21,900,000  lei ; 
advances,  17,800,000  lei  ;  and  current  deposit  accounts, 
10,200,000  lei.  The  government  of  Roumania  issued  paper 
money  soon  after  its  establishment  in  1878,  guaranteed  by 
the  public  domains  to  the  amount  of  26,200,000  lei,  and  the 
National  Bank  was  charged  with  the  withdrawal  of  this 
paper  and  the  substitution  of  its  own  notes.  The  amount 
of  this  special  issue  has  been  gradually  retired  and  the  bank 
reimbursed  by  the  government  until  it  has  disappeared. 
The  net  profits  of  the  bank  in  1894  were  3,203,000  lei.1 

The  bank-note  circulation  of  Bulgaria  is  issued  by  the 
National  Bank,  which  was  founded  on  February  8,  1885,  by 
the  government,  with  a  capital  of  10,000,000  lei  ($2,000,- 
ooo)  in  gold.  The  bank  has  the  exclusive  privilege  of  issu- 
ing notes,  and  they  are  received  in  the  public  depositaries 
and  in  all  other  offices  of 'the  government.  It  is  required 
to  hold  a  cash  reserve  in  gold  equal  to  one-third  the  value 
of  the  notes  in  circulation  and  to  redeem  the  notes  on  demand 
at  the  central  office  or  at  any  of  the  branches.  The  gov- 
ernor of  the  bank  is  named  by  the  Prince  upon  the  nomina- 
tion of  the  Minister  of  Finance  and  four  administrators  are 
appointed  in  the  same  way.  The  government  is  represented 
by  two  delegates,  one  a  counsellor  of  the  court  of  accounts 
and  the  other  a  member  of  the  ministry  of  finance,  who 
exercise  official  supervision  over  the  operations  of  the  bank. 
The  circulation  of  the  bank  on  July  14,  1895,  was  only  2,- 
300,000  levs  ($444,000),  the  cash  reserve  was  4,100,000  levs, 
the  portfolio  of  commercial  paper  19,300,000  levs,  and  the 
current  accounts  40,900,000  levs. 

The  bank-note  circulation  of  Servia  is  issued  by  the 
National  Bank  of  Servia,  which  was  established  by  the  law 
of  January  6,  1883,  subsequently  modified  by  the  law  of  Sep- 
tember 23,  1885.  The  capital  of  the  bank  is  20,000,000 
dinars  ($4,000,000).  The  privilege  of  the  bank  is  fixed 


1  Revue  des  Banques,  April,  1895,  XIV.,  71. 


THE  BANKS  OF  SOU  7^11  ERN  EUROPE. 


285 


for  twenty-five  years  and  includes  the  monopoly  of  note 
issues.  The  notes  of  ten  dinars  ($2)  are  redeemable  in 
silver  and  those  of  larger  denominations  in  gold.  The 
bank  is  authorized,  however,  to  redeem  in  silver  at  its  market 
value  in  a  proportion  fixed  by  the  Minister  of  Finance  upon 
the  special  petition  of  the  bank.  Silver  may  also  be  substi- 
tuted for  gold  to  the  amount  of  not  more  than  twenty-five 
per  cent,  of  the  cash  reserve  and  the  bank  is  not  permitted 
to  increase  its  note  issues  above  two  and  a  half  times  its 
reserve.  The  provision  that  the  notes  may  be  redeemable 
in  part  in  silver  has  led  to  a  degree  of  distrust  of  the  note 
issues  somewhat  similar  to  that  which  existed  in  1893  i*1  tne 
United  States  regarding  the  notes  issued  under  the  Sher- 
man law.  The  distrust  went  far  enough  in  Servia  to  send 
gold  to  a  premium,  in  spite  of  the  fact  that  the  bank 
offered  to  pay  100  francs  in  gold  for  115  francs  in  silver  or 
in  notes  redeemable  in  silver.  This  did  not  accord  with 
the  market  value  of  silver,  but  it  was  feared  that  the  gold 
reserve  of  the  bank  would  become  exhausted  and  that  gold 
payments  would  be  suspended.  The  circulation  of  the  bank 
on  September  22,  1895,  was  26,600,000  dinars  ($5,134,000), 
protected  by  a  specie  reserve  of  10,800,000  dinars,  of  which 
6,100,000  dinars  was  in  gold  and  4,700,000  dinars  in  silver. 
The  discounts  were  7,900,000  dinars,  and  current  accounts 
1,500,000  dinars. 


CHAPTER  XIII. 

THK  BANK  OF  THE   UNITKD  STAGES. 

Banks  of  Issue  before  the  Adoption  of  the  Constitution — Hamilton's 
Plan  for  the  First  Bank  of  the  United  States— The  Struggle  over 
a  New  Charter — The  Second  Bank  of  the  United  States  :  Its  Early 
Errors  and  its  Economic  Services — The  Bank  Dragged  into 
Politics  by  Jackson  and  Clay— Jackson's  Triumph  and  the  Re- 
moval of  the  Deposits — The  Independent  Treasury  System. 

THK  pathway  of  American  colonial  history  is  thickly 
strewn  with  the  failures  of  government  paper  money, 
which  might  have  afforded  an  instructive  lesson  to 
the  Continental  Congress  against  its  issues  of  Continental 
bills.  Several  cases  are  found  also  of  issues  on  private  bank- 
ing credit,  but  they  were  not  based  on  sound  banking  prin- 
ciples and  do  not  shine  greatly  by  comparison  with  the 
unrestrained  issues  resting  on  the  fiat  of  the  State.  The 
"Land  and  Manufactures  Bank,"  established  in  Massachu- 
setts in  1740,  did  not  pretend  to  do  better  than  issue  notes 
redeemable  in  goods,  but  they  stood  for  a  time  so  much 
higher  than  "  Massachusetts  bills  "  that,  in  spite  of  the  hos- 
tility of  Governor  Belcher,  merchants  specially  advertised 
goods  to  be  sold  for  "  Manufactory  bills."  '  In  Connecticut 
in  1733  the  New  London  Society  for  Trade  and  Commerce 
circulated  notes  which  were  current  until  prohibited  by  the 
authorities,  and  in  New  Hampshire  a  company  of  "  private 
gentlemen  "  attempted  to  meet  the  demand  for  a  circulating 
medium  by  an  issue  of  bills.  Most  of  these  schemes,  in- 
cluding that  of  the  specie  bank,  formed  to  counteract  the 


1  Weeden,  487. 

286 


THE  BANK  OF   THE    UNITED   STATES.  287 

Land  and  Manufactures  Bank,  fell  under  the  prohibition  of 
the  Joint  Stock  Companies'  Act.  This  act  was  passed  in 
England  after  the  bursting  of  the  South  Sea  Bubble  in  1720 
and  forbade  the  formation  of  banking  companies  without  a 
special  charter,  but  it  was  not  until  1740  that  it  was  declared 
by  Parliament  to  extend  to  the  colonies. 

The  history  of  banks  of  issue  in  the  United  States  can 
hardly  be  said  to  have  begun,  however,  until  the  foundation 
of  the  Bank  of  Pennsylvania.  The  bank  originated  in  the 
plan  of  a  numoer  01  citizens  of  Philadelphia  to  su£plv  the 
army  with  rations,  and  their  first  bills,  issued  in  "1780,  were 
nothing  more  than  interest-bearing  notes  payable  at  a  future 
time.  The  advances  in  Continental  money  made  by  the 
shareholders  were  secured  by  bills  of  exchange  for  ;£  150,000 
drawn  on  the  envoys  in  Europe,  but  not  intended  to  be 
negotiated.1  Approval  was  given  by  Congress  May  26, 
1781,  to  the  plan  of  Robert  Morris  for  the  Bank  of  North 
"AmericaJ_with  a  capital  of  $400,000,  to  be  increased  if  desired. 
Morris  arranged  with  the  Bank  of  Pennsylvania  to  transfer 
the  foreign  bills  it  was  holding  to  the  new  bank  and  paid  in 
cash  its  claims  against  the  Federation.-  The  charter  of 
the  Bank  of  North  America  was  not  actually  granted  until 
December  31,  1781,  and  business  was  begun  January  7,  1782. 
There  was  so  much  doubt  of  the  power  of  Congress  to 
charter  a  bank  that  a  charter  was  obtained  April  i,  1782, 
from  the  State  of  Pennsylvania,  under  which  the  bank  con- 
tinued to  operate  until  absorbed  into  the  national  banking 
system  in  1863.  The  bank  did  much  to  restore  order  to  the 
chaos  of  Federation  finances  and  loaned  Morris,  as  Superin- 
tendent of  Finance,  $1,249,975,  of  which  $996, 58 1  was  repaid 
in  cash  and  the  remainder  by  surrendering  the  bank  stock 
owned  by  the  Federation.  The  government  had  originally 
paid  for  its  stock  in  silver  brought  from  France,  but  this 
silver  was  infinitely  more  productive  by  the  skilful  manage- 
ment of  the  bank  than  it  could  ever  have  been  if  covered 
into  the  public  treasury.  Livingston  wrote  to  Dana  Decem- 
ber 17,  1782  : 

1  Sumner,  Finances  of  the  American  Revolution,  II.,  22. 


288          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

Paper  is  entirely  out  of  circulation,  if  we  except  the  bank  paper, 
which,  being  payable  at  sight  in  specie,  is  equal  to  it  in  value.  So 
extensive  has  this  circulation  been  that  the  managers  not  long  since 
published  a  distribution  of  the  first  half-year1  s  dividend  at  four  and  a 
half  per  cent,  notwithstanding  a  variety  of  expenses  to  which  they 
had  been  put  in  the  first  organization  of  the  bank.1 

The  Jirst  Bank  of  the  United  States  was  incorporated  by 
the  First  Congress  in  1791, 2  as  a  part  of  the  scheme  of  Alex- 
ander Hamilton  to  strengthen  the  new  Federal  government. 
Those  who  had  opposed  the  adoption  of  the  Constitution 
because  of  its  centralizing  tendencies,  and  some  of  those  who 
had  supported  it,  opposed  the  granting  of  the  bank  charter 
upon  the  ground  that  the  Constitution  contained  no  express 
grant  to  Congress  of  the  power  to  establish  a  corporation. 
Their  argument  was  that  the  case  fell  plainly  within  the 
rule  subsequently  embodied  in  the  tenth  amendment  to  the 
Constitution,  that  "  The  powers  not  delegated  to  the  United 
States  by  the  Constitution,  nor  prohibited  by  it  to  the  States, 
are  reserved  to  the  States  respectively  or  to  the  people." 
President  Washington  obtained  the  opinion  of  the  members 
of  the  cabinet  before  signing  the  bill.  The  opinions  of 
Jefferson  and  Edmund  Randolph  were  adverse  to  the  con- 
stitutionality of  the  measure  ;  but  Washington  followed  the 
advice  of  Hamilton,  his  brilliant  young  Secretary  of  the 
Treasury,  and  gave  the  bill  his  approval. 

The  capital  of  the  Bank  of  the  United  States  was  fixed  at 
$10,000,000,  divided  into  2^,000  shares  of  $400  each.  The 
protection  of  small  investors  in  bank  stock  was  sought  by  a 
graduated  scale  of  voting  which  did  not  permit  more  than 
thirty  votes  to  any  shareholder.  Foreign  shareholders  were 
not  allowed  to  vote  by  proxy,  which  practically  prevented 
their  voting  at  all.  The  number  of  directors  was  fixed  at 
twenty- five,  who  must  be  citizens  of  the  United  States  and 
not  more  than  three-fourths  of  whom  were  eligible  for  re- 
election. The  bank  was  not  forbidden  to  loan  on  real 
estate  security,  but  could  not  become  an  owner  of  real  estate 


1  Wharton,  Diplomatic  Correspondence,  VI.,  146. 

2  Act  of  February  25,  1791. 


THE  BANK   OF   THE    UNITED   STATES.  289 

(beyond  what  was  needed  for  banking  houses)  unless  the 
property  came  into  its  hands  in  satisfaction  of  mortgages  or 
judgments.1  The  only  limitation  upon  note  issues  was  that 
which  limited  all  debts  other  than  deposits  to  the  amount  of 
the  capital  stock.  The  notes  were  receivable  for  dues  to  the 
government  so  long  as  they  were  redeemable  in  coin  on  de- 
mand. The  charter  was  granted  for  twenty  years,  with  the 
provision  that  Congress  should  not  charter  another  bank 
within  that  time.  This  was  far  from  implying  a  monopoly 
of  note  issues,  for  the  State  banks  were  in  no  way  disturbed 
in  their  privileges  and  methods  except  so  far  as  the  new 
institution  by  its  example  acted  as  a  regulator  of  the  currency. 
Its  large  capital  and  pre-eminent  position  operated,  and  were 
intended  to  operate,  to  give  it  such  a  commanding  position 
as  was  occupied  by  the  Bank  of  England  among  the  country 
banks  of  that  country. 

The  charter  provided  that  jDnj^fifth  of  the  capital  should 
be  subscribed  by  the  government  of  the  United  States,  but  a 
loan  was  to  be  made  to  the  government  equal  to  the  amount 
subscribed,  to  be  repaid  in  ten  annual  instalments  of  $200,- 
ooo  each,  with  interest  at  six  per  cent.  No  other  loans  were 
to  be  made  to  the  government  exceeding  $100,000  without 
authority  of  law.  The  practical  effect  of  the  government 
holdings  of  stock  was  simply  to  give  the  bank  the  note  of 
the  government  for  its  final  payment,  but  as  the  bank  was 
forbidden  to  deal  in  its  own  stock  the  process  of  issue  of  the 
government  stock  was  somewhat  complicated.  It  would 
have  been  useless  for  the  government  to  draw  money  from 
Europe  to  pay  into  the  treasury  of  the  bank,  to  be  immedi- 
ately drawn  out  again  and  remitted  to  Europe  for  charges 
there.  The  course  adopted  was  for  the  Treasurer  of  the 
United  States  to  draw  bills  of  exchange  on  the  American 
Commissioners  in  Amsterdam  for  the  amount  required  to 


1  It  is  significant  of  Hamilton's  growing  familiarity  with  finance  that 
he  did  not  revive  the  project  of  the  bank  of  issue  based  upon  landed 
security  which  had  attracted  him  a  few  years  before,  but  laid  down 
in  his  report  the  correct  theory  of  a  credit  currency  based  upon  quick 
assets. —  Works,  III.  ,106-107. 
19 


2QO          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

pay  the  bank.  The  bills  were  purchased  by  the  bank  and 
warrants  issued  in  favor  of  the  Treasury  upon  the  bank, 
thereby  placing  the  amount  in  the  Treasury.  Other  war- 
rants were  then  issued  upon  the  Treasury  in  favor  of  the 
bank  for  the  amount  of  the  subscription  to  the  stock,  which 
the  bank  receipted  for  as  paid.  The  stock  having  been  thus 
paid  for  in  accordance  with  law,  the  bank  loaned  $2,000,- 
ooo  to  the  government  in  accordance  with  the  act  of  incor- 
poration by  handing  over  the  bills  of  exchange  originally 
drawn  by  the  Treasury  on  Amsterdam. l 

The  Bank  of  the  United  States  was  authorized  to  establish 
offices  of  discount  and  deposit  in  the  several  States  and 
$4,700,000  of  the  capital  was  reserved  for  the  central  bank 
at  Philadelphia.  The  remainder  was  divided  among  eight; 
branches,  established  eventually  at  New  York,  Baltimore, 
Boston,  Washington,  Norfolk,  Charleston,  Savannah  and 
New  Orleans.  Private  subscriptions  were  required  to  be 
paid  one-fourth  in  gold  and  silver  and  three-fourths  in  six 
per  cent,  government  stocks  or  in  three  per  cent,  stocks.  The 
capital  was  over-subscribed  to  the  amount  of  four  thousand 
shares  within  two  hours  after  the  opening  of  the  books. 
Oliver  Wolcott,  who  afterwards  succeeded  Hamilton  as  Secre- 
tary of  the  Treasury,  was  offered  the  presidency,  but  de- 
clined, and  Thomas  Willing  of  Philadelphia  was  selected. 

The  bank  was  more  successful  in  its  commercial  dealings 
than  in  obtaining  prompt  payment  of  its  advances  to  the 
government.  No  regular  reports  were  made  to  the  Treasury 
Department,  but  the  report  communicated  to  Congress  by 
Secretary  Gallatin  for  January  24,  1811,  showed  resources 
of  $24,183,046,  of  which  the  leading  items  were  $14,578,294 
in  loans  and  discounts,  $2,750,000  in  United  State  six  per 
cent,  stock,  and  $5,009,567  in  specie.  The  leading  items  of 
liability  were  $10,000,000  on  account  of  capital,  $5,037,125 
in  circulating  notes,  $5,900,423  in  individual  deposits,  and 
$1,929,999  in  United  States  deposits.  The  average  annual 
dividends  paid  up  to  March,  1809,  were  over  eight  per  cent. 


Bolles,  II.,  129-30. 


THE  BANK  OF   THE    UNITED   STATES.  29 1 

The  bank  made  several  loans  to  the  government  in  antici- 
pation of  the  revenues  early  in  its  career.  They  were  not 
promptly  paid  and  the  debt  of  the  government  to  the  bank 
at  the  end  of  1792  was  $2,556,595,  which  increased  at  the 
end  of  1795  to  $6,200,000.  An  attempt  was  made  to  sell 
government  five  per  cent,  stock,  but  only  $i  20,000  was  realized 
and  it  became  necessary  for  the  government  to  part  with  one 
of  its  most  valuable  assets, — its  shares  in  the  bank.  The 
third  and  fourth  instalments  of  the  original  $2,000,000  loan 
to  the  government  were  not  paid  until  1797,  when  2160  shares 
of  the  government  stock  were  sold  at  $500  per  share  (a  pre- 
mium of  $100)  and  the  proceeds,  $1,080,000,  were  applied 
to  these  two  instalments  and  to  other  obligations  of  the  gov- 
ernment to  the  bank.  Six  hundred  and  twenty  more  shares 
were  sold  soon  afterwards  for  $304,260  and  in  1802  the  re- 
maining shares  were  sold  at  an  advance  of  forty-five  per 
cent,  and  the  government  ceased  to  be  a  stock-holder. 
Secretary  Gallatin  reported  in  1809  that  the  government 
made  a  profit  of  $671,860  on  the  sale  of  its  shares,  besides 
receiving  dividends  at  the  rate  of  about  eight  and  three- 
eights  per  cent,  annually.  The  aggregate  payments  by  the 
government,  including  interest,  were  $2,636,427,  while  the 
proceeds  and  dividends  together  were  $3,773,580,  represent- 
ing a  profit  of  nearly  fifty-seven  per  cent,  on  the  original 
investment  for  the  eleven  years  during  which  the  government 
was  a  shareholder.1 

Opposition  to  the  Bank  of  the  United  States  did  not  die 
out  with  Washington's  administration  nor  with  its  large 
advances  to  the  government.  The  conception  of  the  func- 
tions of  a  bank  which  then  prevailed  is  indicated  by  Presi- 
dent Jefferson's  letter  of  July  12,  1803,  to  Gallatin,  in  which 
he  declared,  ' '  I  am  decidedly  in  favor  of  making  all  the  banks 
republican  by  sharing  deposits  among  them  in  proportion  to 
the  dispositions  they  show."  The  bank  had  a  steady  friend 
in  Gallatin,  however,  and  he  not  only  continued  to  avail 
himself  of  its  assistance  in  the  fiscal  operations  of  the 


1  Sen.  Ex.  Doc.  38,  52d  Cong.,  2d  Sess.,  34. 


2Q2          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

government,  but  induced  Jefferson  to  approve  a  bill  estab- 
lishing a  branch  at  New  Orleans. 

The  charter  of  the  bank  was  to  expire  in  1811  and  the 
shareholders  petitioned  in  1808  for  a  renewal.  The  proposal 
was  strongly  supported  by  Gallatin  in  a  report  of  March  9, 
1809,  reviewing  the  entire  history  of  the  bank.  He  recom- 
mended that  the  capital  be  increased  to  $30,000,000,  with  a 
view  to  lending  three-fifths  of  the  amount  to  the  government 
in  case  of  war,  and  that  the  States  be  allowed  to  subscribe 
$15,000,000.  The  advantage  derived  by  the  government 
from  the  existing  bank  he  classified  under  the  four  heads  of 
safe  keeping  of  the  public  monies,  transmission  of  public 
monies,  collection  of  revenue,  and  loans.1  Congress  was 
not  disposed  to  adopt  so  comprehensive  a  scheme  as  this, 
but  theoretical  opposition  to  the  bank  had  so  far  yielded  to 
practical  considerations  that  the  terms  of  a  contract  were 
arranged  for  a  new  charter,  which  received  the  approval  of 
the  House  on  April  21,  1810,  by  a  vote  of  75  to  35.  It  was 
the  fatal  incapacity  of  the  Eleventh  Congress  to  take  positive 
action  which  prevented  the  taking  up  of  the  bill  again,  and 
gave  the  State  bankers  time  to  organize  an  opposition  and 
instruct  their  senators  against  re-charter.2 

The  charter  was  opposed  at  the  next  session  not  only  by 
the  advocates  of  strict  construction  of  the  Constitution,  but 
by  party  factions  opposed  to  Gallatin  in  the  Cabinet  and  the 
Senate.  William  Duane  and  Michael  L,eib  had  attempted  to 
dictate  the  Federal  appointments  in  Philadelphia  and  upon 
Gallatin's  refusal  to  submit  became  his  bitter  enemies.  They 
were  supported  in  the  bank  contest  by  a  Maryland  clique 
headed  by  Robert  Smith,  the  Secretary  of  State,  and  Sena- 
tor Samuel  Smith,  his  brother.  The^fact  that  about  1800 
of  the  2500  shares  were  held  abroad  was  made  the  occasion 
of  bitter  attacks  upon  the  bank.  A  type  of  this  sort  of  op- 
position was  the  speech  of  Mr.  Desha  of  Kentucky,  in  the 
House  on  February  12,  1811,  in  which  he  declared  that  this 
accumulation  of  foreign  capital  was  one  of  the  engines  for 

1  Stevens,  261. 

2  Adams,  V.,  208. 


THE  BANK  OF   THE    UNITED   STATES.  293 

overturning  civil  liberty  and  that  he  had  no  doubt  George 
III.  was  a  principal  stock-holder  and  would  authorize  his 
agent  in  this  country  to  bid  millions  for  a  renewal  of  the 
charter.1  Gallatin  had  anticipated  this  ground  of  hostility 
in  his  report  to  Congress.  He  called  attention  to  the  fact 
that  the  foreign  shareholders  had  no  vote  and  that  if  the 
charter  was  not  renewed  the  principal  of  the  foreign  hold- 
ings would  have  to  be  remitted  abroad  in  liquidation  of  the 
affairs  of  the  bank. 

William  H.  Crawford  of  Georgia  was  the  champion  of 
Gallatin  and  the  bank  in  the  Senate  and  his  able  argument 
commended  him  to  the  administration  and  made  him  a  strong 
candidate  in  later  years  for  the  presidency.  Henry  Clay  held 
that  Congress  had  no  power  to  create  the  bank  or  to  continue 
it,  and  followed  the  leanings  of  Mr.  Desha  in  the  opinion 
that  in  case  of  war  with  England  "the  English  premier" 
would  exercise  control  over  the  institution.  The  House  on 
January  24,  1811,  postponed  indefinitely  the  bill  for  renew- 
ing the  charter  by  a  vote  of  65  to  64.  The  vote  in  the  Sen- 
ate^ on  February  2oth  was  17  to  17,  and  the  Vice- President, 
George  Clinton,  an  enemy  of  Gallatin,  gave  the  casting  vote 
against  the  bill.  "The  necessity  for  such  an  institution," 
says  Mr.  Henry  Adams,  "[was  merely  one  of  the  moment, 
but  in  the  period  of  national  history  between  1790  and  1860, 
the  year  1811  was  perhaps  the  only  moment  when  destruc- 
tion of  the  bank  threatened  national  ruin."a  The  govern- 
ment  was  compelled  to  rely  in  the  war  of  1812  on  the  State 
banks,  and  their  suspension  of  specie  payments  in  1814  al- 
inust  paralyzed  the  operations  of  the  Treasury.  ^  It  became 
impossible  to  make  transfers  of  funds  from  one  part  of  the 
Union  to  another,  because  the  notes  of  the  banks  of  one  sec- 
tion  did  not  pass* current  in  other  sections.]  Gallatin  has  left 
on  record  the  opinion  that  the  suspension  of  specie  payments 
in  1814  "might  have  been  prevented  at  the  time  when  it 
took  place,  had  the  former  Bank  of  the  United  States  been 
still  in  existence. ' '  He  believed  that  the  bank  would  have 

1  White,  265. 

8  History  of  the  United  States,  V.,  329. 


294          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

aided  the  treasury  and  that  "  both  acting  in  concert  would 
certainly  have  been  able  at  least  to  retard  the  event  ;  and,  as 
the  treaty  of  peace  was  ratified  within  less  than  six  months 
after  the  suspension  took  place,  that  catastrophe  wrould  have 
been  altogether  avoided." 

The  necessity  for  means  of  carrying  on  the  war  with 
Great  Britain  led  to  a  great  variety  of  odd  proposals  in  Con- 
gress after  the  suspension  of  1814.  One  of  the  crudest  of 
these  was  a  plan  of  ex- President  Jefferson's,  communicated 
to  President  Madison,  to  issue  $20,000,000  in  government 
promissory  notes  annually  as  long  as  might  be  necessary  and 
to  appeal  to  the  State  legislatures  to  relinquish  the  right  to 
establish  banks.  Dallas,  who  succeeded  Gallatin  as  Secre- 
tary of  the  Treasury  on  October  6,  1814,  indicated  indirectly 
his  opinion  of  this  scheme  by  recommending  a  new  bank 
and  remarking  that  "  The  extremity  of  that  day  cannot  be 
anticipated  when  any  honest  and  enlightened  statesman  will 
again  venture  upon  the  desperate  expedient  of  a  tender 
law."  1  The  plan  of  Dallas,  as  set  forth  in  his  report  of 
October  lyth,  was  for  a  bank  with  a  capital  of  $50,000,000,  em- 
powered to  lend  $30,000,000  to  the  Treasury. .  There  was  a 
provision  in  the  bill  reported,  authorizing  the  suspension  of 
specie  payments  at  the  discretion  of  the  President  of  the 
United  States,  and  it  was  fallen  upon  by  Daniel  Webster  in 
a  speech  of  great  power  and  eloquence.  He  urged  the_crea- 
tion  of  a  bank  for  commercial  purposes  rather  than  one  in- 
volved at  the  outset  with  the  government.  The  result  of 
his  attack  was  the  defeat  of  the  bill  by  a  tie  vote,  which  was 
then  reconsidered  and  the  bill  sent  to  a  select  committee. 
Amendments  were  adopted  which  met  Mr.  Webster's  views, 
but  in  this  form  the  measure  did  not  meet  the  wants  of  the 
Treasury.  It  passed  the  House,  120  to  38,  and  the  Senate, 
20  to  14,  but  was _vetoedj)y  the  President  on  January  30, 
1815.  Another  effort  was  made  to  pass  the  Dallas  bill,  but 
it  failed  in  the  House  on  February  iyth  by  a  majority  of  one 
vote. 


1  Adams,  VIII.,  245-49. 


THE  BANK  OF   THE    UNITED   STATES.  2g$ 

The  evils  of  the  currency  had  not  been  remedied  when 
Congress  met  again  in  December,  ,i.8i£,  and  President  Madi- 
son suggested  a_national__bank  as  a  suitable  instrument  for 
promoting  specie  payments.  Secretary  Dallas  submitted  a 
detailed  plan  for  the  bank,  which  was  adopted  by  Congress 
with  little  change.  The  capital  of  the  new  bank  was  fixed 
at  $35,000,000,  of  which  one-fifth  was  to  be  subscribed  by 
the  government'  in  money  or  in  its  own  obligations.  The 
government  subscription  was  by  a  stock  note,  which  was  not 
fully  paid  up  in  cash  until  1831.  The  public  funds  were  to 
be  deposited  in  the  bank,  "  unless  the  Secretary  of  the  Treas- 
ury shall  at  any  time  otherwise  order  and  direct  ;  in  which 
case  the  Secretary  of  the  Treasury  shall  immediately  lay  be- 
fore Congress,  if  in  session,  and  if  not,  immediately  after 
the  commencement  of  the  next  session,  the  reasons  for  such 
order  or  direction. ' '  Twenty-five  directors  were  to  be  chosen, 
five  to  be  named  by  the  President,  and  the  notes  of  the  bank 
were  made  receivable  in  all  payments  to  the  United  States. 
The  bank  was  again  given  duration  for  twenty  years  and  no 
other  bank  was  to  be  established  within  this  time  by  Congress 
outside  the  District  of  Columbia.  This  privilege,  as  in  the 
case  of  the  first  bank,  carried  with  it  no  restrictions  upon  the 
State  banks  of  issue  except  such  as  the  new  bank  was  ex- 
pected to  exercise  by  its  moral  and  financial  influence  tow- 
ards the  restoration  of  specie  payments.  A  bonus  to  the 
government  was  required  of  $500,000  annually  for  three 
years  after  the  end  of  the  second  year. 

The  progress  of  public  opinion  in  favor  of  the  implied 
powers  of  the  Federal  government  under  the  Constitution  is 
indicated  by  the  attitude  of  Madison  and  the  democratic 
party  towards  the  incorporation  of  the  second  Bank  of  the 
United  States.  Madison  as  a  member  of  the  First  Congress 
had  opposed  the  incorporation  of  the  Bank  of  the  United 
States  upon  constitutional  grounds,  and  in  1799  had  alluded 
to  it  as  one  of  the  examples  of  the  usurping  tendencies  of 
the  Federal  government ;'  but  as  President  in  1814  and  1815 


1  Von  Hoist,  I.,  388. 


296          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

he  was  willing  to  treat  the  constitutional  issue  as  res  adjudi- 
cata.  More  surprising  is  the  fact  that  Calhoun,  in  later 
years  the  hair-splitting  logician  of  strict  construction  and 
the  champion  of  nullification,  was  found  foremost  among 
the  supporters  of  the  charter  of  the  second  bank.  He  re- 
ported the  bill  to  the  House  and  suggested  that  if  the  bank  by 
its  financial  policy  was  unable  to  compel  the  State  banks  to 
return  to  specie  payments,  Congress  might  resort  to  stronger 
measures,  which  were  within  their  power.  Both  Calhoun 
and  Webster  favored  the  refusal  by  the  government  of  the 
notes  of  suspended  banks  and  the  collection  of  all  govern- 
ment dues  in  specie.1  Webster  secured  an  amendment  to 
the  bank  bill,  requiring  the  payment  of  deposits  as  well  as 
notes  in  specie,  subject  to  a  forfeit  of  twelve  per  cent,  on  the 
amount  for  which  specie  payment  was  refused. 

The  constitutional  question  had  thus  been  decided  by  the 
legislative  branch  of  the  government  before  it  reached  the 
Supreme  Court  in  1819.  That  court,  in  the  celebrated  case  of 
McCulloch  vs.  Maryland,  in  which  the  Decision  was  rendered 
by  Chief-Justice  Marshall,  decided  that  the  power  to  create 
a  national  bank,  to  assist  in  carrying  on  the  fiscal  opera- 
tions of  the  government,  was  within  the  implied  powers 
of  the  Constitution.  Equally  important  was  the  decision 
upon  the  direct  issue  raised  in  that  case,  whether  the  States 
could  constitutionally  levy  taxes  upon  the  circulating  notes 
or  the  property  of  a  national  bank.  Representative  Fiske 
of  New  York,  in  a  strong  speech  in  favor  of  the  renewal  of 
the  first  charter  in  1811,  declared  that  the  States,  in  order  to 
give  the  preference  to  their  own  paper,  might  exclude  that 
of  any  other  State  from  circulation  within  their  limits  by 
taxation.2  He  did  not  suggest  that  they  might  pursue  the 
same  policy  towards  the  notes  of  a  national  bank,  but  this 
position  was  taken  by  the  State  of  Maryland  towards  the 
notes  of  the  second  Bank  of  the  United  States,  and  the  case 
was  carried  to  the  Supreme  Court.  A  decision  in  favor  of 
the  right  of  the  States  to  have  taxed  the  circulating  notes  of 

1  White,  278. 

2  Bolles,  II.,  150. 


THE  BANK  OF   THE    UNITED  STATES.  297 

the  United  States  or  of  corporations  chartered  under  its  laws, 
.  would  have  precluded  forever  the  creation  of  a  national  cur- 
rency, issued  either  by  the  government  or  by  national  banks. 
Indeed,  if  the  Federal  government  had  not  the  power  to 
withdraw  its  creations  from  discriminating  legislation  by 
the  States,  Chief-Justice  Marshall  declared,  they  might  tax 
the  mail  or  the  mint,  the  papers  of  the  custom  house,  or  the 
forms  of  judicial  process.1 

fhe  question  of  the  existence  of  the  bank  in  the  face  of 
(  discriminating  State  taxation  was  not  an  academic  one  in 
iSi8  and  the  following  years,  but  one  which  was  severely 
practical.  The  efforts  of  the  bank  to  drive  the  State  notes 
from  circulation,  and  especially  its  later  contraction  of  dis- 
counts when  it  found  itself  on  the  verge  of  bankruptcy, 
caused  commercial  distress  and  made  the  bank  exceedingly 
.  North  Carolina  laid  a  tax  of  $5000  per  year  on 


the  branch  at  Fayetteville.  Kentucky,  Tennessee,  Ohio,  and 
Maryland  laid  taxes  on  circulation  or  on  the  branches  as 
such.  The  Maryland  act  required  the  purchase  of  stamped 
paper  for  the  printing  of  the  circulating  notes  or  the  annual 
payment  of  $15,000  by  the  branch  at  Baltimore.  The  branch 
continued  to  issue  notes  on  unstamped  paper  and  the  cashier, 
William  McCulloch,  was  sued  for  debt  and  gave  his  name  to 
one  of  the  most  celebrated  of  American  constitutional  cases.9 
Chief-Justice  Marshall,  in  rendering  his  decision,  admitted 
that  the  States  possessed  unimpaired  the  power  of  taxing  the 
people  and  property  of  the  State  and  that  it  might  tax  the 
real  property  of  the  bank  in  common  with  other  such  prop- 
erty within  the  State,  and  might  tax  the  interest  of  citizens 
of  Maryland  in  the  bank  ;  but  he  declared  that  the  Consti- 
tution of  the  United  States  placed  beyond  the  reach  of  State 
power  all  the  powers  conferred  on  the  government  of  the 
Union  and  all  the  means  given  for  the  purpose  of  carrying 
those  powers  into  execution.3 

1  4  Wheaton,  316. 

2  McMaster,  IV.,  497. 

3  Following  this  decision,  all  securities  of  the  United  States  have 
been  held  free  from  taxation  by  the  States  unless  with  the  consent  of 


298          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

The  Bank  of  the  United  States  was  badly  managed  during 
the  first  years  of  its  existence  and  in  the  summer  of  1818 
was  upon  the  verge  of  insolvency.  The  bank  began  busi- 
ness January  7,  1817,  and  violated  its  charter  from  the  out- 
set. The  proportion  of  specie  required  to  be  paid  in  on  the 
second  and  third  instalments  was  not  paid  and  the  bank 
loaned  money  to  stockholders  on  the  pledge  of  their  stock 
and  personal  notes.  Trading  in  shares  before  they  were  paid 
for  pushed  up  the  quotations  and  the  bank  loaned  on  the  in- 
creased value  when  other  nominal  security  was  furnished  in 
the  form  of  mutual  indorsements.  The  Baltimore  branch 
was  practically  wrecked  by  its  managers,  with  a  loss  of 
$1,671,221.  The  policy  adopted  for  restoring  specie  pay- 
ments was  also  defective.  An  arrangement  was  made  with 
the  leading  banks  of  New  York,  Philadelphia,  and  Rich- 
mond for  the  resumption  of  specie  payments  by  them  on 
February  20,  1817.  The  public  deposits  in  these  banks, 
which  the  government  had  been  unwilling  to  accept  in  de- 
preciated bank  paper,  were  to  be  transferred  to  the  Bank  of 
the  United  States,  but  checks  on  the  State  banks  which  were 
parties  to  the  agreement  received  by  the  Bank  of  the  United 
States  were  to  be  credited  as  cash.  Arrangements  were  also 
made  for  liberal  discounts  by  the-  new  bank,  in  order  to  re- 
lieve the  local  banks  from  the  commercial  pressure. 

These  features  of  the  resumption  policy  were  not  subject 
to  criticism  and  $7,472,419  in  public  funds  and  $3,336,491  in 
special  deposits  were  transferred  from  the  State  banks  to  the 

the  United  States.  The  national  banks  created  under  the  Act  of  June 
3,  1864,  for  many  years  availed  themselves  of  this  condition  to  have 
as  large  a  proportion  of  their  reserves  as  possible  in  United  States 
notes  at  the  times  when  their  property  became  subject  to  assessment 
for  taxation  under  State  laws.  This  practice  led  to  an  act  of  Congress 
in  1894,  authorizing  the  States  to  tax  such  notes  at  the  same  rate  as 
other  money.  It  was  long  held  that  the  instruments  of  State  sover- 
eignty were  exempt  from  Federal  taxation  upon  the  same  grounds  that 
the  instruments  of  Federal  sovereignty  were  exempt  from  State  taxa- 
tion, but  this  view  was  overruled  in  regard  to  the  circulating  notes  of 
State  banks  in  the  case  of  Veazie  Bank  vs.  Fenno,  8  Wall.,  533.  See 
Kent,  I.,  429,  note. 


THE  BANK  OF   THE    UNITED   STATES.  299 

central  bank  at  Philadelphia.  Eighteen  branches  of  the 
Bank  of  the  United  States  were  established  and  the  notes 
issued  were  received  for  government  dues  without  reference 
to  the  place  of  issue  and  were  redeemable,  wherever  issued, 
by  the  central  bank  or  any  of  its  branches.  The  mistake 
made  by  the  new  bank  was  in  directing  the  branches  to  push 
their  own  notes  into  circulation  in  place  of  those  of  the  State 
banks,  and  to  issue  drafts  on  the  Eastern  cities  to  prevent 
the  remittance  of  their  own  notes.  The  notes  of  the  local 
banks  were  locked  up  in  the  Bank  of  the  United  States  and 
interest  charged  upon  them  to  the  local  banks,  but  both  the 
notes  of  the  branches  and  the  branch  drafts  were  remitted 
eastward  by  the  operations  of  trade.  The  notes  of  the 
Western  branch  banks  which  were  remitted  to  the  East  thus 
exercised  no  controlling  influence  over  the  volume  of 
Western  business,  for  they  were  not  presented  for  redemp- 
tion in  the  West.  What  made  the  matter  worse  was  the 
necessity  imposed  itu-many  cases  on  the  branches,  in  view 
of  the  eastward  movement  of  their  own  notes,  to  pay  out 
again  the  local  notes  in  the  granting  of  discounts. 

The  Western  branches  paid  but  limited  attention  to  the 
instructions  of  the  parent  bank  to  diminish  their  discounts, 
even  after  the  danger  of  their  policy  became  apparent. 
They  issued  what  were  known  as  "race-horse  bills,"  by 
which  drafts  were  made  by  one  branch  upon  another,  which 
were  met  when  due  at  the  accepting  bank  by  new  drafts 
upon  some  other  branch.  The  bank  imported  $7,311,750 
in  specie  from  Europe  during  its  first  two  years  at  a  cost  of 
$525,247,'  but  the  drain  upon  its  resources  had  reduced  the 
specie  in  Philadelphia  on  April  21,  1819,  to  $126,745,  of 
which  $79,125  was  owed  to  the  city  banks  of  Philadelphia.3 
The  facts  regarding  the  mismanagement  of  the  bank  were 
brought  out  by  the  report  of  a  committee  of  Congress  in 
1819  and  caused  many  demands  for  the  repeal  of  the  charter. 
Langdon  Cheves  was  elected  President,  March  6,  1819,  and  he 
adopted  heroic  measures  to  restore  the  bank  to  solvency. 

1  Poor,  486. 
2Bolles,  II.,  326. 


300          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

| He  borrowed  $2,500,000  in  specie  of  the  Barings,  who  were 
considerable  holders  of  the  bank  stock,  forbade  the  issue  of 
notes  in  the  South  and  West  when  exchanges  were  against 
the  branches,  which  was  almost  invariably  the  case,  and  in 
dealings  with  the  government  insisted  upon  the  interval 
between  the  transfer  of  funds  and  their  disbursement  which 
was  actually  required  for  the  transfers.  The  bank  was 
saved  and  was  conducted  with  comparative  prudence  until 
the  breaking  out  of  the  war  with  President  Jackson. 

The  second  Bank  of  the  United  States  undoubtedly 
contributed  for  more  than  a  decade  to  facilitate  the  transfer 
_qf_.fnnHs  from  one  part  of  the  county  to  another  and  to 
maintain  a  uniform  circulation  equal  to  coin.  The  rates  of 
domestic  exchange,  which  were  necessarily  high  because 
of  the  imperfect  means  of  communication,  were  materially 
reduced  by  the  bank.  Its  policy  greatly  benefitted  com- 
merce, but  invited  bitter  complaints  from  the  private  dealers 
in  exchange,  who  had  been  enabled  to  make  excessive  prof- 
its while  the  currency  was  below  par  because  of  its  different 
values  in  different  States  and  the  constant  fluctuations  in 
these  values.  The  bank,  in  the  language  of  the  report  of 
Senator  Smith  of  Maryland  in  1832,  furnished  "  a  currency 
as  safe  as  silver,  more  convenient,  and  more  valuable  than 
silver,  which  through  the  whole  Western  and  Southern  and 
interior  parts  of  the  Union,  is  eagerly  sought  in  exchange 
for  silver  ;  which,  in  those  sections,  often  bears  a  premium 
paid  in  silver  ;  which  is,  throughout  the  Union,  equal  to 
silver,  in  payment  to  the  government,  and  payments  to 
individuals  in  business."  Mr.  McDuffie,  who  submitted  the 
minority  report  in  the  House  at  the  same  time,  declared  that 
"The  whole  business  of  dealing  in  domestic  bills  of  ex- 
change, so  essential  to  the  internal  commerce  of  the  country, 
has  been  almost  entirely  brought  about  within  the  last  eight 
37ears.  In  June,  1819,  the  bank  did  not  own  a  single  dollar  of 
domestic  bills  ;  and  in  December,  1824,  it  owned  only  to 
the  amount  of  $2,378,980;  whereas  it  now  owns  to  the 
amount  of  $23,052,972."  ' 

1  House  Rep.,  460,  22d  Cong.,  ist  Sess.,  312. 


THE  BANK  OF   THE    UNITED  STATES.  30! 

One  of  the  most  serious  charges  of  evasion  of  law,  brought  j 
against  the  bank  in  1832,  was  in  the  issue  of  branch  drafts  * 
to  circulate  as  currency.  Several  appeals  were  made  in  vain 
to  Congress  to  modify  one  of  the  provisions  of  the  charter 
requiring  the  president  and  principal  cashier  to  sign  all  the 
circulating  notes.  The  volume  of  circulation  necessary  to 
do  business  was  so  great  that  the  physical  labor  of  signature 
could  not  well  be  performed  by  those  officers.  Congress 
neglected  to  act  and  in  1827  an  opinion  was  obtained  from 
Horace  Binney,  in  which  Daniel  Webster  and  William  Wirt 
concurred,  that  there  was  no  legal  obstacle  to  the  issue  of 
checks  drawn  by  officers  of  the  branches  upon  the  parent 
bank,  printed  for  even  amounts  in  similar  form  to  bank- 
notes. Drafts  of  this  sort  for  $5  and  $10  were  authorized  by 
the  board  of  directors  on  April  6,  1827,  and  denominations 
of  $20  were  issued  in  1 83 1 .  They  became  a  common  medium 
of  circulation  in  the  South  and  West  and  were  accepted  in 
payments  to  the  United  States  Treasury.1  The  branch 
drafts  outstanding  in  April,  1832,  were  $7,410,090.  They 
simply  served  the  purpose  of  currency  without  conforming 
strictly  to  the  intent  of  the  law,  in  much  the  same  manner 
as  the  checks  of  the  I/ondon  Cheque  Bank  or  the  temporary 
issues  in  the  United  States  during  the  panic  of  1893. 

The  Bank  of  the  United  States  fell  because  so  great  an  •  | 
institution  in  a  representative  republic  could  not  escape 
political  entanglements  and  the  suspicion  of  the  abuse  of 
political  power!  President  Jackson  surprised  the  financial 
world  by  the  announcement,  in  his  first  annual  message  in 
1829,  that  "Both  the  constitutionality  and  the  expediency 
of  the  law  creating  the  bank  are  well  questioned  by  a  large 
portion  of  our  fellow-citizens  ;  and  it  must  be  admitted 
by  all,  that  it  has  failed  in  the  great  end  of  establishing  a 
uniform  and  sound  currency."  The  bank  was  at  this  time^ 
under  the  presidency  of  Nicholas  Biddle,  who  succeeded 

1  Letter  of  Sec.  Rush  to  Nicholas  Biddle,  Jan.  21,  1820.  House  Rep., 
460,  22d  Cong.,  ist  Sess.,  55.  The  authority  to  receive  these  drafts 
for  public  dues  was  revoked  by  Secretary  Woodbury,  to  take  effect 
January  i,  1835. 


302          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

Cheves  in  1823,  and  was  one  of  the  most  imposing  institu- 
tions of  the  country.  The  President's  message,  therefore, 
was  in  the  nature  of  a  thunderbolt  from  a  clear  sky.  Jack- 
son's hostility  was  due  to  a  complaint  by  Isaac  Hill,  a  New 
Hampshire  politician  who  had  been  made  Second  Comp- 
troller, that  Mr.  Mason,  the  manager  of  the  branch  at 
Portsmouth,  New  Hampshire,  had  shown  partiality  to  the 
political  opponents  of  General  Jackson  and  that  his  conduct 
had  been  "  calculated  not  less  to  injure  the  institution  than 
to  disgust  and  disaffect  the  principal  business  men."  "  No 
measure  short  of  his  removal,"  in  Hill's  opinion,  ''would 
tend  to  reconcile  the  people  of  New  Hampshire  to  the 
bank." 

The  truth  appears  to  have  been  that  Mason  had  excited 
hostility  by  his  energetic  contraction  of  discounts  at  Ports- 
mouth and  his  efforts  to  correct  previous  mismanagement. 
]>vi  Woodbury,  who  had  defeated  Mason  for  the  United 
States  Senate  in  1824,  addressed  a  letter  early  in  July,  1829,  to 
Mr.  Ingham,  the  Secretary  of  the  Treasury,  making  com- 
plaints against  Mason's  management,  which  Ingham  for- 
warded to  President  Biddle  for  his  consideration.  Biddle 
was  a  ready  writer,  he  occupied  one  of  the  most  powerful 
positions  in  the  country,  he  was  surrounded  by  flatterers 
and  sycophants,  and  he  was  quickly  entrapped  into  a  quarrel 
which  resulted  in  the  overthrow  of  the  bank.  He  not  only 
denied  that  the  bank  had  shown  political  favor  at  Ports- 
mouth or  elsewhere,  but  went  out  of  his  way  to  declare  that 
the  governing  board  acknowledged  no  responsibility  what- 
ever to  the  Secretary  of  the  Treasury  in  regard  to  the  politi- 
cal opinions  of  the  officers  of  the  bank  and  that  it  was] 
carefully  shielded  by  its  charter  from  executive  control.  So 
fixed  had  become  the  relations  between  the  bank  and  the 
Treasury  in  the  handling  of  public  monies,  and  so  much  a 
matter  of  mere  routine,  that  Biddle  appeared  to  overlook  the 
possibility  of  the  withdrawal  of  the  public  deposits.  He 
evidently  had  no  realizing  sense  of  the  danger  which  hung 
over  his  head  or  of  the  spirit  of  hostility  which  was  being 
aroused  in  the  mind  of  Jackson. 


THE   BANK  OF  THE  UNITED   STATES.  303 

The  President's  suggestions  in  his  annual  message  excited 
the  fear  for  a  moment  that  he  had  information  which  was 
not  known  to  the  public  and  bank  shares  dropped  from  125 
to  1 1 6,  only  to  recover  to  130  after  a  report  by  a  committee 
of  Congress.  The  portions  of  the  message  relating  to  the 
bank  were  referred  to  committees  in  both  houses,  both  of 
which  exonerated  the  bank  from  the  charge  of  bad  manage- 
ment and  condemned  the  suggestion  of  the  President, 
whether  a  national  bank,  *  *  founded  upon  the  credit  of  the 
government  and  its  revenues,  might  not  be  devised  which 
would  avoid  all  constitutional  difficulties,  and  at  the  same 
time,  secure  all  the  advantages  to  the  government  and  coun- 
try that  were  expected  to  result  from  the  present  bank." 
The  House  on  May  10,  1830,  tabled,  by  a  vote  of  89  to  66, 
resolutions  that  the  House  would  not  consent  to  the  renewal 
of  the  bank  charter  and  on  May  29th  tabled,  by  a  vote  of 
95  to  67,  resolutions  calling  for  a  comprehensive  report  of 
the  proceedings  of  the  bank.1  Similar  votes  in  favor  of  the 
bank  were  given  in  the  Senate.  The  President  was  mild  in 
his  allusions  to  the  subject  in  the  annual  messages  of  1830 
and  1831  and  the  Secretary  of  the  Treasury  was  even  allowed 
in  the  latter  year  to  incorporate  in  his  annual  report  a  strong 
argument  in  the  bank's  favor.  It  is  not  improbable  that 
Jackson  might  have  been  persuaded  by  the  eminent  finan- 
ciers of  his  party  to  consent  to  a  re-charter  if  the  matter  had 
not  been  made  an  issue  by  Henry  Clay  in  the  presidential 
campaign. 

Th^iolilicaLdangers  of  a  great  central  bank  were  demon- 
strated in  the  campaign  of  1832.  President  Jackson  had 
given  the  country  in  the  main  a  firm  and  successful  admin- 
istration and  it  was  necessary  for  Clay  and  the  Whigs  to 
create  political  issues  upon  which  to  make  a  respectable 
contest  against  him.  There  were  dangers  in  making  the 
tariff  the  controling  issue,  because  different  Whig  States 
were  on  both  sides  of  the  question.  Clay  determined  to 
make  the  campaign  upon  the  issues  of  internal  improvement 
and  the  recharter  of  the  bank.  It  was  natural  that  he  should 


Sumner,  Andrew  Jackson,  247. 


304          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

accept  the  sentiment  of  the  financial  portion  of  the  commu- 
nity in  favor  of  the  bank  as  the  sentiment  of  the  whole  and 
he  was  so  confident  of  success  that  he  feared  Jackson  would 
evade  the  issue.  The  resolutions  adopted  at  Baltimore  on 
December  12,  1831,  at  Clay's  instigation,  declared  that  the 
President,  ' '  is  fully  and  three  times  over  pledged  to  the 
people  to  negative  any  bill  that  may  be  passed  for  recharter- 
ing  the  bank. ' '  Biddle  and  the  real  friends  of  the  bank  who 
were  not  politicians  protested  strongly  against  making  the 
recharter  a  party  issue,  but  Clay  forced  them  to  the  choice 
between  sustaining  his  party  as  the  friends  of  the  bank  or 
going  without  political  friends.  Professor  Sumner  declares 
that  ''Jackson  never  was  more  dictatorial  and  obstinate  than 
Clay  was  at  this  juncture."  ' 

The  fight  was  opened  in  the  Senate  on  January  9,  1832, 
when  Senator  Dallas  presented  the  memorial  of  the  bank  for 
the  renewal  of  its  charter.  Biddle  came  to  Washington, 
opened  headquarters,  gave  sumptuous  entertainments,  and 
defended  the  bank  vigorously  before  the  committee  of  inves- 
tigation appointed  by  Congress.  The  bill  for  the  recharter 
was  passed  through  both  houses,  only  to  encounter  a  veto 
message  from  President  Jackson  on  July  loth.  The  issue 
was  thus  made  up  for  the  presidential  election,  exactly  as 
Clay  desired  it,  but  the  response  of  the  people  was  219  elec- 
toral votes  for  Jackson,  49  for  Clay,  and  18  for  all  others. 
The  executive  triumphed,  as  usual  in  a  contest  with  Con- 
gress, and  the  doom  of  the  bank  was  decided. 

The  bank  had  five  years  of  life  before  it.  Its  credit  was 
good  and  it  still  held  the  public  deposits.  It  was  not  gener- 
ally supposed  that  these  would  be  withdrawn  until  near  the 
date  for  the  termination  of  the  charter,  as  had  been  the  case 
with  the  public  deposits  in  the  first  Bank  of  the  United 
States.  Jackson's  blood  was  now  up,  however,  and  he 
needed  no  further  stimulus  to  crush  his  enemy.  The  bank 
made  two  serious  blunders  during  1832  and  1833  in  its  rela- 
tions with  the  Treasury.  It  undertook  to  make  a  private 
arrangement  with  the  Barings  regarding  the  payment  of 

1  Andrew  Jackson,  257. 


THE  BANK  OF  THE  UNITED   STATES.  305 

$5,000,000  of  government  three  per  cent,  securities,  which 
the  Secretary  of  the  Treasury  had  notified  the  President  of 
the  bank  as  early  as  March  24,  1832,  would  be  paid  from  the 
surplus  revenues.  A  contract  was  made  through  a  private 
agent  of  the  bank  for  extending  these  securities,  which  were 
to  be  assumed  by  the  bank  and  the  interest  paid  to  the  gov- 
ernment. The  object  was  to  retain  possession  of  the  public 
money,  on  deposit  with  the  bank,  which  was  worth  seven 
per  cent,  in  the  discount  market,  rather  than  permit  it  to  be 
withdrawn  for  the  redemption  of  the  debt.  When  the  cir- 
cular of  the  Barings  got  into  the  newspapers  in  October, 
Biddle  was  obliged  to  disavow  the  contract  and  made  a  lame 
explanation  to  Secretary  McLane  for  seeking  to  delay  the 
payment.  The  other  case  was  the  attempt  to  collect  dam- 
ages upon  the  amount  of  a  bill  of  exchange  drawn  upon  the 
French  government,  which  was  refused  payment  by  the 
French  Minister  of  Finance,  because  the  money  had  not 
been  appropriated  by  the  Chambers.  The  bill  was  taken  up 
by  the  Paris  agents  of  the  bank,  and  charged  against  it. 
Secretary  McL,ane  paid  the  principal,  $961,240,  which  had 
been  covered  into  the  Treasury,  back  to  the  bank  and 
offered  to  pay  actual  costs.  The  bank  insisted  upon  fifteen 
per  cent,  damages,  under  a  law  of  the  District  of  Columbia 
relating  to  protested  paper,  and  deducted  the  amount  from 
the  government  dividends.  The  government  sued  and  the 
Supreme  Court  decided  against  the  bank. 

Performances  like  these  on  the  part  of  President  Biddle 
convinced  Jackson  that  the  bank  was  weak  and  confirmed 
his  purpose  to  suspend  the  further  deposit  of  public  monies 
in  its  custody.1  Mr.  McLane  was  transferred  from  the 
Treasury  to  the  State  Department  during  the  spring  of  1833 
and  William  J.  Duane  of  Pennsylvania  was  made  Secretary 
of  the  Treasury.  Duane  was  a  conservative  and  able  law- 
3^er,  with  little  of  the  politician  in  his  make-up,  and  when 

1  Jackson  also  believed  that  if  the  bank  retained  the  public  funds, 
it  would  be  able  to  buy  up  the  votes  in  Congress  necessary  to  make 
two-thirds  and  pass  a  recharter  bill  over  his  veto. — Sumner,  Andrew 
Jackson,  299. 


306          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

the  President  insisted  upon  his  suspending  deposits  in  the 
Bank  of  the  United  States  and  making  them  in  future  in  the 
State  banks,  Duane  refused  to  comply  and  the  President  re- 
moved him  from  office.  Roger  B.  Taney,  who  afterwards 
became  so  odious  in  the  free  States  as  Chief  Justice  of  the 
Supreme  Court,  was  transferred  from  the  Department  of  Jus- 
tice to  the  Treasury  on  September  23d,  and  began  the  deposit 
of  the  public  funds  in  the  State  banks. 

The  contest  which  followed  in  Congress  belongs  to  the  h]s^ 
Jtory  of  politics  rather  than  that  of  finance.  The  Senate  re- 
jected the  nomination  of  Taney  for  Secretary  of  the  Treasury 
and  rejected  the  President's  nominees  for  government  direc- 
tors of  the  bank,  apparently  upon  the  remarkable  ground 
that  they  were  disposed  to  insist  upon  too  accurate  a  knowl- 
edge of  the  bank's  affairs.  The  Senate  called  for  the  paper 
which  Jackson  had  read  in  the  cabinet  regarding  the  removal 
of  the  deposits  on  September  i8th,  and  received  the  reply 
that  the  Senate  had  no  constitutional  right  to  interrogate 
him  on  the  subject  of  his  communications  with  his  heads  of 
departments.  Clay  introduced  a  resolution  which  was  passed 
on  March  28,  1834,  by  a  vote  of  26  to  20,  declaring  that  the 
President  had,  "  assumed  upon  himself  authority  and  power 
not  conferred  by  the  Constitution  and  the  laws,  but  in  deroga- 
tion of  both."  The  President  sent  a  protest  against  this 
resolution  to  the  Senate  on  April  lyth,  which  that  body  ten 
days  later  voted,  27  to  16,  was  a  breach  of  the  privileges  of 
the  Senate  and  should  not  be  entered  on  the  journal.  The 
friends  of  Jackson  appealed  to  the  people  and  gained  enough 
seats  in  the  Senate  to  pass  resolutions  on  January  16,  1837, 
expunging  the  previous  resolutions  from  the  records. 

JlheJBank  of  the  United  States  obtained  a  charter  from  the 
State  of  Pennsylvania  on  February  18,  1836,  for  thirty  years. 
The  bank  agreed  to  pay  a  bonus  of  $2,000,000  to  the  State 
and  $100,000  per  yea£  fbr_thj_rt£"years,  besTdes  various  sub- 
scriptions to  the  stock  of  transportation  routes,  which  Ben- 
ton  described  as  bribery  of  the  legislature  and  the  people. 
The  shares  in  the  bank  owned  by  the  United  States,  amount- 
ing to  $7,000,000,  were  paid  in  four  annual  instalments  at 


THE  BANK  OF  THE  UNITED   STATES. 


307 


the  rate  of  115.58.  New  stock  was  sold  to  replace  the  gov- 
ernment stock,  leaving  the  capital  intact  at  $35,000,000. 
The  capital  was  too  large  for  local  commerciaTneettiTand 
Biddle  branched  out  into  loans  on  stocks  of  uncertain  value, 
many  of  which  proved  worthless  after  the  crisis  of  1837. 
The  bank  suspended  at  that  time  with  the  other  banks  of 
the  country,  but  was  compelled  to  suspend  again  in  1838, 
and  again  in  1841,  after  which  it  went  into  liquidation.  The 
creditors  were  paid,  but  the  shareholders  lost  their  entire 
interest.  Biddle  had  resigned  in  March,  1839,  leaving  the 
bank,  according  to  his  view,  in  a  prosperous  condition.  He 
was  indicted  during  the  liquidation  for  conspiracy  to  defraud 
the  shareholders.  The  indictment  was  quashed,  but  Biddle 
was  ruined  financially  and  died  within  five  years  insolvent 
and  broken-hearted.1 

The  principal  items  in  the  accounts  of  the  second  Bank  of 
the  United  States  up  to  the  time  of  its  final  suspension  are 
shown  in  the  following  table  : 


YEAR. 

LOANS. 

DEPOSITS. 

CIRCULATION. 

SPECIE. 

1820 

$31,401,158 

$    6,568,794 

$    3,598,481 

$    3,392,755 

1830 

40,663,805 

16,045,782 

12,924,145 

7,608,076 

1834 

54,911,461 

10,838,555 

19,208,379 

10,039,237 

1835 

51,808,739 

11,756,905 

17,339,797 

I5>708,369 

1836 

59,232,445 

5,06l,456 

23,075,422 

8,417,988 

1837 

57,393,709 

2,332,409 

11,447,968 

2,638,449 

1838 

45,256,571 

2,6l6,7I3 

6,768,067 

3,770,842 

1839 

4I,6l8,637 

6,779,394 

5.982,621 

4,153,607 

1840 

36,839,593 

3,338,521 

6,695,86! 

1,469,674 

The  present  method  of  dealing  with  public  monies  in  the 
United  States  is  one  of  the  results  of  the  war  over  the  United 
States  Bank.  Secretary  Taney,  under  Jackson's  instruc- 
tions, depositedjpublic  money  in  certain  State  banks, — most 
of  them  selected  because  their  officers  were  friendly  to  the 
administration  and  characterized  by  its  critics  as  the  ' '  pet 
banksj'  The  government  imposed  upon  them  the  condi- 
tions of  giving  security  in  certain  cases,  of  issuing  no  small 

1  Sumner,  Andrew  Jackson ,  342. 


308          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

notes  and  of  keeping  one-third  of  their  reserve  in  specie.1 
The  State  banks  undertook  by  mutual  agreement  to  honor 
each  other's  notes  and  drafts,  but  the  crisis  of  1837  caused 
a  general  suspension  and  the  payment  of  $25,000,000  of  the 
deposits  in  bank-notes  bearing  an  average  depreciation  of  ten 
per  cent.  Secretary  Taney  in  his  report  for  1834  urged  legis- 
lation to  sanction  the  use  of  the  State  banks  as  depositaries,  I 
but  the  bill  prepared  on  the  subject  failed  in  the  Senate. 
The  suspension  of  the  banks  in  1837  led  President  Van  Buren, 
in  his  annual  message  of  that  year,  to  recommend  that  the 
public  funds  be  kept  exclusively  by  public  officers  and  that 
nothing  but  specie  be  received  for  dues  to  the  government. 
This  plan — embodying  substantially  the  features  of  the 
present  independent  treasury  system — was  several  times  de- 
feated, but  was  finally  enacted  June  flolM_i  840.  One-fourth  of 
all  dues  to  the  Treasury  were  to  be  paid  at  once  in  specie, 
and  an  additional  fourth  each  year  until  the  whole  were  thus 
paid. 

The  success  of  Harrison  and  the  Whigs  resulted  in  the 
repeal  of  the  independent  treasury  law  August  13,  1841.  and 
two  national  bank  bills  were  passed,  only  to  be  successively 
vetoed  by  President  Tyler.  The  public  monies  were  de- 
posited in  the  banks  or  not,  at  the  discretion  of  public  offi- 
cials, until  1846,  when  the  independent  treasury  system  was 
again  established  by  authority  of  Congress.  The  policy  of 
refusing  State  bank-notes  for  government  dues  continued 
until  the  creation  of  the  national  banking  system  during  the 
Civil  War.  That  system  gave  the  government  the  security 
of  its  own  bonds  for  the  bank-notes,  and  the  national  bank- 
ing act  provided  that  the  notes  should  be  "  received  at  par 
in  all  parts  of  the  United  States  in  payment  of  taxes,  ex- 
cises, public  lands,  and  all  other  dues  to  the  United  States, 
except  for  duties  on  imports  ;  and  also  for  all  salaries  and 
other  debts  and  demands  owing  by  the  United  States  to  in- 
dividuals, corporations,  and  associations  within  the  United 
States,  except  interest  on  the  public  debt,  and  in  redemption 

1  Kinley,  17. 


THE  BANK:  OF  THE  UNITED  STATES.          309 

of  the  national  currency."  *  The  national  banks  were  again 
made  the  depositaries  of  public  money  during  the  first  ad- 
ministration of  President  Cleveland,  but  were  required  by 
the  Secretary  of  the  Treasury  to  deposit  United  States  bonds 
as  security  for  such  monies  in  much  the  same  manner  as  for 
the  security  of  national  bank-notes.  The  amount  of  deposits 
in  the  banks  on  August  i,  1888,  when  Secretary  Fairchild 
made  a  report  on  the  subject  to  Congress,  was  $54,475,055. 
exclusive  of  $4,052,021  on  deposit  to  the  credit  of  disbursing 
officers.  The  number  of  banks  among  which  these  deposits 
were  distributed  was  about  three  hundred  and  the  largest 
deposit  was  $1,100,000.  The  policy  of  Secretary  Windom 
and  the  absorption  of  the  surplus  reduced  these  deposits  after 
1892  and  their  entire  amount  on  January  ;2,  1896,  was  $14,- 
27 1 , 280.  The  independent  Treasury  continues  to  transact  the 
bulk  of  the  public  business  and  sub-treasuries  are  maintained 
at  New  York,  Philadelphia,  Boston,  Baltimore,  Cincinnati, 
Chicago,  St.  Louis,  New  Orleans,  and  San  Francisco. 

1  Act  of  June  3,  1864,  Sec.  23. 


CHAPTER   XIV. 

THE    STATE    BANKING  SYSTEMS. 

The  Condition  of  the  Country  When  They  were  Adopted — Success 
of  the  Suffolk  System  and  of  Banking  on  General  Assets — The 
New  York  Safety  Fund  and  Security  Systems — Unhappy  Experi- 
ence in  the  West  and  South  with  Banks  of  State— The  Effects  of 
the  Civil  War — Failure  of  the  Security  Syjjiem — General  Statis- 
tics of  the  State  Banks. 

THE  systems  of  banking  authorized  under  the  laws  of 
the  various  States  of  the  United  States  offer  examples 
of  nearly  every  form  of  note  issues  and  every  degree 
of  success  or  failure.  The  economic  development  of  the 
country  between  the  Revolution  and  the  Civil  War  was  in 
an  experimental  stage  as  well  as  its  political  development. 
The  rules  of  sound  banking  had  not  yet  been  worked  out 
even  in  the  older  countries  of  Europe,  as  the  mistakes  and 
failures  of  English,  French,  and  Austrian  banking  abund- 
antly show  ;  but  to  ordinary  sources  of  error  and  risk  were 
added  in  the  United  States  the  elements  of  experiment  and 
uncertainty  in  every  department  of  human  activity.  The 
Englishman  or  Frenchman  might  not  be  a  good  banker,  but 
he  could  at  least  form  an  intelligent  estimate  of  the  volume 
of  trade  with  which  he  had  to  reckon  and  the  conditions  un- 
der which  it  was  carried  on.  His  problem  was  simply  to  > 
work  out,  according  to  sound  rules,  a  mathematical  prob- 
lem for  which  the  necessary  elements  were  known.  .With  % 
the  American,  on  the  other  hand,  every  element  was  an  un- 
known quantity.  He  had  to  guess  at  the  first  element  in  his 
equation,  and  if  he  guessed  wrongly  absolute  accuracy  in 

310 


THE   STATE  BANKING   SYSTEMS.  311 

his   further  computations  could  not   possibly  yield  a  true 
result. 

A  new  country,  poor  in  specie  and  in  loanable  capital,  is  I 
almost  forced  by  the  necessities  of  her  situation  to  adopt  I 
monetary  devices  which  would  not  be  tolerated  under  better 
conditions.     Some  of  these  devices  would  be  comparatively 
harmless  if  their  true  character  were  understood  and  they 
were  used  with  moderation  ;  but  their  tendency  is  mislead- 
ing and  intoxicating  to  the  average  mind  and  they  are  usu- 
ally so  abused  as  to  offset  the  little  benefit  which  might  be 
derived  from  them.     The  most  successful  banking  systems  i 
under  State  law  in  the  United  States  were  those  of  New  I 
York  and  New  England,  where  the  surplus  capital  of  the  \ 
country  in  the  earlier  days  was  concentrated..    The  least  suc- 
cessful systems  were  in  the  newer  and  poorer  sections  of  the 
country  and  they  grew  progressively  worse  as  inexperience, 
and  poverty  seemed  to  make  more  imperative  the  necessity 
for  creating  something   out   of  nothing.      Four   distinctly 
marked  systems  of  note  issue  were  in  operation  in  the  Unitejd 
States  side  by  side  almost  up  to  the  close  of  the  Civil  War 
and  it  is  not  surprising   that  the  conglomerate   currency 
which  they  created  has  left  unsavory  memories  behind  it. 
These  four  systems  were  :  Issues  upon  general  assets  ;  issues 
protected  by  a  general  safety  fund  ;  issues  based  upon  public 
securities  ;  and  issues  based  upon  the  faith,  and  credit  of  the 
States.1 


1  The  principal  sources  for  the  preparation  of  this  chapter  have  been 
the  monographs  prepared  by  Mr.  L.  Carroll  Root  for  the  "  Sound 
Currency  Committee  "  of  the  New  York  Reform  Club  ;  the  report  of 
John  J.  Knox,  the  United  States  Comptroller  of  the  Currency,  for 
1876  ;  the  report  prepared  by  Mr.  Henry  H.  Smith,  Assistant  Register 
of  the  Treasury,  in  response  to  Senate  resolutions  of  July  26,  1892, 
printed  as  Sen.  Ex.  Doc.  38,  52d  Cong.,  2d  Sess.  ;  and  the  report  of 
Comptroller  A.  B.  Hepburn  for  1892.  The  investigations  of  these 
gentlemen  have  brought  together  and  co-ordinated  a  mass  of  material 
which  would  otherwise  have  to  be  sought  with  great  labor  from  a 
variety  of  sources.  Mr.  Root  has  further  favored  me  with  an  examina- 
tion of  this  chapter  and  the  suggestion  of  some  changes,  which  I  have 
adopted. 


312          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

The  best  illustration  of  the  system  of  banking  upon  gen- 
eral assets  is  afforded  by  the  banks  of  New  England,  and 
especially  by  the  banks  of  Boston,  which  became  the  centre 
of  the  New  Kngland  redemption  system.  The  note  issues 
of  the  New  Kngland  banks  were  permitted  in  many  cases  , 
to  exceed  the  proportion  to  capital  which  is  now  consid- 
ered safe,  and  they  were  not  subject  until  late  in  their 
history  to  thorough  official  supervision  ;  but  in  spite  of 
these  defects  of  the  system,  the  notes  usually  circulated  at 
par  and  specie  was  attracted  to  New  England  when  driven 
from  other  sections  of  the  country  by  depreciated  paper. 
The  first  local  bank  in  New  England,  and  the  second  of  the 
kind  in  the  United  States,  was  incorporated  by  act  of  the 
General  Court  of  Massachusetts  on  February  7,  1784,  with 
a  maximum  capital  of  $300, coo,  and  was  called  the  Mas- 
sachusetts Bank.  No  limitations  were  imposed  in  the  original 
Massachusetts  law  upon  note  issues,  but  an  act  of  1792  pro- 
hibited notes  below  $5,  and  the  bank  was  directed  to  limit 
the  amount  of  notes,  together  with  "money  loaned  by  them/ 
by  a  credit  on  their  books  or  otherwise,"  to  "twice  thd 
amount  of  their  capital  stock  in  gold  anci  silver,  actually 
deposited  in  the  banks  and  held  to  answer  the  demands 
against  the  same."  A  general  law  was  passed  in  1799,  pro- 
hibiting banking  by  unincorporated  companies  or  the  fur- 
ther issue,  except  by  the  Nantucket  Bank,  of  notes  below 
$5.  This  provision  was  modified  in  1805  so  as  to  permit  the 
issue  of  bills  of  $i,  $2,  and  $3  to  the  amount  of  five  per  cent, 
of  paid-up  capital.  This  limit  was  increased  in  1809  to  fifteen 
per  cent.,  reduced  in  1812  to  ten  per  cent.,  and  again  in- 
creased in  1818  to  twenty-five  per  cent.,  which  remained  the  I 
limit  during  the  life  of  the  State  banking  system.1 

An  act  was  passed  in  1803,  requiring  semi-annual  re- 
ports of  condition  by  the  Massachusetts  banks  to  the  State 
officials,  and  it  appeared  that  at  that  time  seven  banks  were 
in  operation  with  a  capital  of  $2,225,000  and  a  circulation  of 
$1,565,000.  An  attempt  was  made  in  1811  to  found  a  State 

'Root,  New  England  Bank  Currency,  "Sound  Currency,"  Vol. 
II.,  No.  13,  p.  4. 


THE   STATE  BANKING  SYSTEMS.  313 

bank  occupying  a  similar  relation  to  the  Commonwealth 
that  the  United  States  Bank  had  occupied  towards  the 
national  government,  but  the  State  capital  was  never  sub- 
scribed and  the  authorized  capital  was  reduced  in  1817 
from  $3,000,000  to  $i, 800,000. l  The  charter  of  this  bank 
and  of  the  Merchants'  Bank,  also  incorporated  in  1811, 
served  as  the  model  from  which  most  subsequent  charters  in 
Massachusetts  were  drawn.  One-fifth  of  the  capital  was 
required  to  be  actually  paid  in  before  the  beginning  of 
business  ;  the  stockholders  were  individually  liable  to  the 
amount  of  their  stock  in  case  of  loss  arising  from  misman- 
agement, and  the  liabilities,  exclusive  of  deposits,  were 
limited  to  twice  the  amount  of  the  capital.  The  limit  upon 
circulation,  which  was  thus  incidentally  imposed,  was  re- 
duced in  the  *case  of  most  of  the  later  banks  to  150  per  cent. 
The  Massachusetts  and  other  New  England  banks  main- 
tained specie  payments  in  1814,  when  those  of  other  parts  of 
the  country  suspended,  and  the  current  of  specie  towards 
New  England  swelled  the  holdings  of  the  Massachusetts 
banks  alone,  from  $1,513,000  in  1811  to  $6,946,542  in  1814. 
The  total  banking  capital  authorized  had  increased  in  1828 
to  $9,075,000  and  thirty-six  new  banks  were  incorporated 
in  the  four  years  ending  with  that  date.  A  new  banking 
law  was  passed  on  February  28,  1829,  which  applied  to  banks 
thereafter  incorporated  and  to  those  obtaining  an  increase  of 
capital  or  an  extension  of  their  charters.  The  limit  of  the 
notes  which  a  bank  might  circulate  was  reduced  to  125  per 
cent,  of  the  capital  and  the  total  of  the  debts,  exclusive  of 
deposits,  was  limited  to  twice  the  capital.  A  provision  was 
made  against  the  practice  of  issuing  notes  promising  pay- 

1  The  State  subscribed  $400,000  to  the  capital  of  the  Union  Bank  of 
Boston,  which  was  incorporated  in  1792,  and  was  generally  a  subscri- 
ber at  the  formation  of  new  banks  for  the  next  twenty  years.  About 
$1,000,000  of  bank  stock  in  this  way  came  into  the  hands  of  the  State 
and  afforded  a  generous  dividend  until  it  was  sold  in  1812  to  meet 
some  unusual  expenses.  The  State  does  not  seem  to  have  abused  its 
share  in  the  ownership  by  interference  with  the  management  of  the 
banks.— Martin's  Boston  Stock  Market,  cited  in  Comptroller's  Report 
for  1876. 


314          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

ment  with  interest  at  a  future  date,  by  which  the  banks  had 
endeavored  to  escape  the  obligation  to  pay  cash  on  demand 
to  depositors  and  note-holders.  An  effort  was  made  to  evade 
this  provision  by  issuing  deposit  books,  making  the  same 
promise.  They  were  first  issued  mainly  to  depositors,  but 
they  came  to  be  extensively  issued  during  the  pressure  of 
1834  in  discounting  paper.  The  General  Court  passed  a  law 
in  that  year  prohibiting  the  practice. 

The  organization  of  banks  in  Massachusetts  proceeded 
with  alarming  rapidity  during  this  period  of  speculation, 
and  at  the  end  of  1836,  seventy-eight  new  banks  had  been 
added  to  the  sixty-two  older  banks,  and  forty-three  of  the 
latter  had  obtained  an  increase  of  capital.  Several  banks 
succumbed  towards  the  close  of  the  year,  but  the  Boston  banks 
were  mainly  sound  and  followed  the  New  York  banks  reluc- 
tantly on  May  12,  1837,  in  the  suspension  of  specie  pay- 
ments. An  act  of  1809  imposed  a  penalty  of  two  per  cent. 
a  month  on  banks  which  failed  to  redeem  their  notes  in 
specie.  This  provision  was  not  enforced  in  1837,  and  tne 
General  Court  suspended  it  until  January  i,  1839,  in  the  case 
of  banks  which  kept  their  circulation  within  seventy-five  per 
cent,  of  their  capital,  redeemed  notes  below  $5  in  Boston, 
and  below  $3  elsewhere,  and  complied  with  some  other  condi- 
tions. Voluntary  resumption  took  place  throughout  the  State 
on  August  13,  1838.  Failures  still  continued  among  the  mush- 
room institutions  which  had  been  created  during  the  period  of 
speculation,  and  thirty-two  Massachusetts  banks  wound  up 
their  affairs  between  1837  and  1844.  The  necessity  of  more 
efficient  supervision  by  the  State  was  made  plain  by  the 
crisis  of  1837,  an<^  three  bank  commissioners  were  authorized 
to  make  annual  examinations  of  all  the  banks  and  special 
examinations  when  they  thought  proper.  This  law  was 
repealed  after  five  years,  but  the  Massachusetts  banks  were 
now  upon  a  sound  basis  and  failures  were  few  during  the 
twenty-five  years  before  the  creation  of  the  national  system. 
Only  two  failures  occurred  between  1840  and  1855,  and  the 
notes  in  both  cases  were  paid  in  full. 

Most  of  the  bank  charters  were  renewed  for  twenty  years 


THE   STATE  BANKING   SYSTEMS.  315 

in  1831  and  expired  on  October  i,  1851.  The  renewal  in  the 
latter  year  was  made  the  occasion  of  several  changes  in  the 
banking  laws.  One  of  these  revived  the  board  of  bank 
commissioners  with  the  same  powers  of  examination  as  in 
1838.  Another  change  of  law  imposed  liability  upon  stock- 
holders for  the  redemption  of  notes,  in  case  of  failure,  to  the 
amount  of  their  stock,  without  the  former  limitation  in  re- 
gard to  mismanagement.  The  speculative  mania  which  pre- 
ceded the  crisis  of  1857  resulted  in  the  creation  of  fifty-eight 
new  banks  in  Massachusetts  with  a  capital  of  $14,400,000 
and  157  increases  in  the  capital  of  existing  banks,  amounting 
to  $18, 745,000.  Several  failures  took  place,  but  the  note- 
holders suffered  little  loss  and  a  committee  of  the  legislature 
in  1856  reported  against  the  granting  of  further  charters. 
The  condition  of  the  State  banks  of  Massachusetts  in  1862, 
just  before  absorption  into  the  national  system,  showed  183 
banks  in  operation  with  a  capital  stock  of  $67,544,200  ;  circu- 
lation, $28,957,630  ;  deposits,  $44,737,490;  loans  and  dis- 
counts, $127,592,511  ;  and  specie,  $9,595,53°- 

The  banking  systems  of  the  other  New  England  States 
were  generally  based  upon  the  principle  of  issuing  notes 
against  assets  and  the  banks  maintained  close  relations  with 
those  of  Boston.  The  legislature  of  Maine  took  advantage 
of  the  expiration  of  a  number  of  charters  in  1846  to  adopt 
some  changes  of  law  to  afford  greater  security  for  circulating 
notes.  The  Act  of  August  10,  1846,  provided  that  for  the 
amount  of  circulation  issued  in  excess  of  fifty  per  cent,  of 
the  capital,  one  dollar  in  specie  should  be  kept  for  three  dol- 
lars in  bank-notes  and  that  the  total  circulation  should  never 
exceed  the  capital  plus  the  amount  of  specie  on  hand.  The 
State  of  Vermont  created  in  1831  a  safety  fund  modelled 
closely  upon  that  of  New  York.  Each  bank  thereafter  char- 
tered was  required  to  pay  into  the  State  Treasury,  in  six 
annual  instalments,  the  sum  of  four  and  a  half  per  cent, 
upon  the  amount  of  its  capital  stock,  and  in  case  the  fund 
was  reduced  by  the  failure  of  any  bank  it  was  to  be  restored 
by  assessments  by  the  State  Treasurer,  not  exceeding  three- 
fourths  of  one  per  cent,  in  any  one  year  upon  the  capital  of 


316         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

the  banks.  An  act  was  passed  by  the  General  Assembly  in 
1842,  relieving  the  banks  from  contributions  to  the  safety 
fund  in  case  the  directors  should  execute  satisfactory  bonds 
to  redeem  according  to  law  all  bills  issued  and  to  pay  depos- 
its on  demand. 

The  banking  laws  of  Rhode  Island  were  peculiar  in  the 
facilities  which  they  extended  to  banks  for  recovering  debts. 
The  first  bank  charter, — issued  to  the  Providence  Bank  in 
1791,  and  creating  the  fifth  chartered  bank  then  existing  in 
the  United  States, — provided  that  upon  any  note  or  other 
instrument  expressly  made  payable  at  the  bank,  the  Presi- 
dent or  certain  of  the  directors  might  cause  a  demand  to  be 
made  upon  the  debtor,  in  case  of  his  failure  to  make  pay- 
ment at  maturity,  and  in  case  the  obligation  remained  un- 
paid for  ten  days,  these  officers  might  write  to  either  of  the 
clerks  of  the  courts  of  common  pleas  or  of  the  superior 
court  and  order  such  clerk  to  issue  a  writ  of  execution  capias 
satisfaciendum  fieri  facias,  and  attachment  of  real  estate 
upon  which  the  debt  and  costs  might  be  levied,  whereupon 
the  clerk  was  required  to  issue  such  an  execution,  to  be 
served  by  any  sheriff  or  deputy.  Subsequent  charters  did 
not  even  require  demand  in  writing  or  protest,  but  author- 
ized the  officers  of  the  bank  to  order  the  clerk  of  one  of  the 
courts  to  proceed  to  issue  the  execution.  This  drastic 
method  of  collecting  debts  under  the  ' '  bank  process  ' '  made 
banks  very  popular  investments  with  capitalists  and  ac- 
counted for  their  rapid  increase  up  to  1818.  An  act  was 
passed  forbidding  the  further  granting  of  such  charters,  but 
the  decision  of  ' '  the  Dartmouth  College ' '  case  in  the 
Federal  courts,  denying  the  power  of  the  grantor  of  a  char- 
ter to  change  the  terms  except  with  the  consent  of  the 
grantee,  delayed  any  provision  for  withdrawing  the  pow- 
ers of  the  ''bank  process"  from  banks  already  possessing 
them.  The  arbitrary  character  of  this  process  and  the  hard- 
ships it  inflicted  aroused  strong  popular  feeling  and  resulted 
in  an  act  of  1836  abolishing  the  privileges  of  "the  bank 
process  "  and  limiting  the  banks  thereafter  to  the  same  reme- 
dies as  individuals  for  the  collection  of  debts.  Sixty-one 


THE   STATE  BANKING   SYSTEMS.  317 

banks  then  existed  in  Rhode  Island,  of  which  thirty  pos- 
sessed the  powers  of  the  "bank  process." 

The  peculiar  feature  of  the  New  England  bank  circulation 
was  the  Suffolk  system  of  redemption,  which  was  established 
in  order  to  protect  sound  banking  currency  from  being  driven 
out  of  circulation  by  the  inferior  currency  of  other  States. 
The  suspension  of  specie  payments  south  and  west  of  New 
England  in  1814  resulted  in  the  introduction  of  depreciated 
notes  across  the  Connecticut  border  and  drove  the  Connec- 
ticut bank-notes  into  private  hoards  or  brought  them  to  the 
banks  for  redemption  in  specie.  The  banks  of  Maine  en- 
countered a  similar  situation  prior  to  the  suspension  of  specie 
payments  in  1837.  They  were  forbidden  by  law  to  issue 
notes  below  $5,  with  the  object  of  keeping  the  currency 
saturated  with  coin,  but  this  purpose  was  defeated  by  the 
circulation  of  the  small  notes  of  the  banks  of  neighboring 
States.  The  banks  of  Boston  found  themselves,  even  before 
the  close  of  the  last  century,  under  somewhat  the  same  com- 
petition from  the  country  banks  of  Massachusetts.  The 
Boston  banks  at  first  undertook  to  send  the  country  notes 
promptly  home  for  redemption,  but  the  banks  protested 
against  this  policy.  The  Boston  banks  then  refused  to  re- 
ceive the  country  notes  altogether.  The  result  was  the 
hoarding  of  "Boston  money,"  which  was  sold  at  a  small 
premium  to  persons  having  payments  to  make  at  the 
banks,  while  the  channels  of  circulation  were  filled  with  the 
country  notes,  which  were  known  as  ' '  foreign  "  or  '  *  current 
money." 

Several  attempts  were  made  in  Boston  to  establish  a 
redemption  office  for  sending  notes  home  for  redemption, 
but  it  was  not  until  1813  that  a  systematic  method  of  clear- 
ing and  redemption  for  bank-notes  was  put  in  operation  by 
the  New  England  Bank.  The  discount  on  the  notes  of 
"foreign"  banks  was  larger  than  the  actual  expense  of 
redemption  justified,  and  the  New  England  Bank  gave 
notice  that  it  would  charge  only  the  actual  cost  of  sending 
foreign  money  home  for  redemption  and  obtaining  the 
specie  for  it.  The  execution  of  their  plan  brought  down 


3 1 8"         HISTORY  OF  MODERN  BANKS  OF  ISSUE.- 

the  discount  on  ' '  foreign  ' '  notes  fr^m  four  or  five  per  cent, 
to  one  per  cent,  for  notes  of  Massachusetts  banks  and  some- 
what more  for  those  of  other  States. 

The  Suffolk  Bank  was  incorporated  in  Boston  in  1818  and 
the  directors  determined  to  give  special  attention  to  foreign 
exchanges.  A  committee  appointed  to  consider  the  subject 
in  1819  reported  that  it  was  expedient  "to  receive  at  the 
Suffolk  Bank  the  several  kinds  of  foreign  money  which  are 
now  received  at  the  New  England  Bank,  and  at  the  same 
rates."  They  recommended  that  if  any  bank  should  make 
a  permanent  deposit  of  $5000  with  the  Suffolk  Bank,  with 
such  further  sums  as  were  necessary  from  time  to  time  to 
redeem  its  bills  taken  by  the  Suffolk  Bank,  such  bank 
should  have  the  privilege  of  receiving"  its  bills  at  the  same 
discount  at  which  they  were  purchased.  They  recommended 
that  the  banks  of  Providence  and  Newport  and  twenty-three 
others  keeping  an  account  with  the  Suffolk  have  the 
privilege  of  receiving  such  of  their  bills  as  were  received  by 
the  Suffolk  bank  at  the  same  discount  as  taken,  without  the 
permanent  deposit  of  $5000,  provided  these  banks  would 
make  all  their  deposits  at  the  Suffolk  Bank  and  at  all  times 
have  money  to  redeem  the  bills  taken.  J  The  policy  to  be 
adopted  towards  banks  refusing  to  make  a  deposit  wras  to 
send  their  notes  home  for  redemption.  These  recommenda- 
tions were  put  in  force  and  the  lively  competition  of  the 
Suffolk  with  the  New  England  Bank  soon  forced  exchange 
on  Massachusetts  notes  to  one-half  of  one  per  cent.,  or 
even  less. 

The  notes  of  the  Boston  banks  were  still  crowded  out  of 
circulation  by  the  slight  discount  on  the  notes  of  the  country 
banks  and  it  was  found  in  1824  that  the  permanent  circula- 
tion of  the  eleven  city  banks,  with  a  capital  of  $11,150,000, 
was  not  more  than  $300,000,  while  the  country  banks,  with 
a  capital  of  less  than  $9,000,000,  had  a  circulation  of 
$7,500,000.  An  agreement  was  made  between  the  Suffolk 
and  six  other  Boston  banks  by  which  a  fund  of  $300,000  in 
their  notes  was  furnished  the  Suffolk,  to  be  paid  out  in 

1  Whitney,  7-8. 


THE  STATE  BANKING  SYSTEMS.  319 

equal  proportions  in  the  purchase  of  country  bank-notes.  l 
The  tendency  of  this  policy  was  to  force  the  city  notes  into 
circulation  and  withdraw  the  country  notes  unless  they 
were  maintained  absolutely  at  par  by  the  action  of  the 
country  banks.  The  plan  was  vigorously  resisted  at  first 
by  the  country  banks  and  the  Boston  association  was 
decorated  with  such  opprobrious  names  as  the  "Holy 
Alliance"  and  "  Six-tailed  Bashaw."  The  country  banks 
were  forced  to  yield,  however,  and  most  of  them  consented 
to  make  the  permanent  deposit  of  $2000  which  was  now 
required,  in  addition  to  a  sufficient  sum  for  current  redemp- 
tions. The  notes  of  those  maintaining  their  redemption 
fund  were  received  at  par  and  were  charged  up  against  them 
once  a  week  or  as  often  as  might  be  convenient.  The  Suf- 
folk Bank  charged  interest  whenever  the  amount  redeemed 
exceeded  the  funds  to  the  credit  of  the  issuing  bank,  but 
received  the  notes  of  all  banks  in  good  standing  and  placed 
them  to  the  credit  of  the  bank  sending  them  in. 

A  sort  of  clearing  house  was  thus  established  which 
enabled  the  issues  of  one  bank  to  be  set  off  against  those  of 
another  in  making  settlements.  The  effect  of  restoring  the 
country  notes  to  par  was  to  reduce  the  circulation  of  sixteen 
Massachusetts  banks  within  six  months  by  $382,781  and  to 
increase  the  circulation  of  the  Boston  banks  by  $283,497. 
When  any  bank  refused  to  join  the  Suffolk  system,  the 
Suffolk  Bank  simply  presented  its  notes  for  redemption. 
This  course  soon  convinced  the  majority  of  the  country 
banks  that  it  was  better  to  clear  through  the  Suffolk  Bank 
than  to  maintain  an  unequal  competition  with  neighboring 
banks,  which  had  the  prestige  of  belonging  to  the  Suffolk 
system  and  whose  notes  were  at  par  throughout  New  Eng- 
land. The  suspension  of  specie  payments  in  1837  Pu*-  an 
end  to  enforced  redemption  for  a  time,  but  the  majority  of 
the  banks  continued  to  settle  their  balances  through  the 
Suffolk  Bank  and  their  bills  passed  current  all  over  the 

'John  Amory  Lowell,  who  served  on  the  "Foreign  Money  Com- 
mittee "  for  forty-two  years,  and  William  Lawrence,  prepared  this 
plan  and  report. 


320          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

Union,  while  those  of  the  other  banks  had  only  a  local 
circulation.  l 

A  branch  redemption  agency  was  established  in  Rhode 
Island,  by  which  the  Merchants'  Bank  of  Providence  received 
at  par  from  the  Rhode  Island  banks  the  bills  of  all  other 
banks  in  New  England  and  settled  balances  as  far  as 
possible  among  the  Rhode  Island  banks.  Bills  issued  by 
banks  outside  of  Rhode  Island  were  sent  to  Boston,  and 
Rhode  Island  bills  were  sent  in  bulk  by  the  Suffolk  Bank  to 
Providence.  Legal  encouragement  was  given  to  the  Suffolk 
system  in  Vermont  by  the  Act  of  1842,  which  levied  a  tax 
of  one  per  cent,  upon  bank  capital,  but  remitted  the  tax  to 
any  bank  which  should  ' '  keep  a  sufficient  deposit  of  funds 
in  the  City  of  Boston,  and  should  at  that  city  uniformly 
cause  its  bills  to  be  redeemed  at  par. ' '  All  but  three  of 
the  Vermont  banks  were  members  of  the  system  before  1848 
and  in  1850  all  had  joined.  Several  of  the  Maine  banks 
resisted  for  a  time  and  received  the  support  of  the  bank 
commissioners  in  1837,  but  their  circulation  became  limited 
to  their  immediate  locality  and  the  system  was  commended 
by  the  commissioners  in  later  reports. 

The  handsome  profits  derived  by  the  Suffolk  Bank  from 
the  redemption  system  led  to  several  efforts  to  establish  a 
rival  institution.  The  work  of  the  Suffolk  Bank  was  so  well 
done  that  it  was  not  until  1855  that  these  efforts  bore  tangible 
fruit.  The  Bank  of  Mutual  Redemption  was  then  estab- 
lished for  the  specific  purpose  of  redeeming  the  currency  of 
the  New  England  banks  at  par.  The  bank  went  into  opera- 
tion in  1858,  with  135  New  England  banks  interested  as 
stockholders  and  thirty-five  keeping  a  permanent  deposit 
aggregating  $143,000.  The  bank  was  admitted  to  the 
clearing  house  after  a  struggle  and  most  of  the  country 


1  "At  the  time  when  the  Suffolk  system  was  at  its  best  I  lived  in 
Chicago.  The  notes  of  Massachusetts  banks  were  in  great  request 
there.  They  were  considered  the  best  currency  .going  and  they  bore 
a  premium  over  the  notes  of  Illinois  and  Wisconsin  banks."  Testi- 
mony of  Horace  White  before  House  Committee  on  Banking,  House 
Report  1508,  53d  Cong.,  3d  Sess.,  84. 


THE   STATE  BANKING  SYSTEMS.  32! 

banks  withdrew  from  the  Suffolk  and  transferred  their  de- 
posits to  the  Bank  of  Mutual  Redemption.  There  was  some 
friction  between  the  two  institutions  and  it  was  feared  in 
some  quarters  that  the  entire  system  would  be  endangered, 
but  a  mutual  exchange  of  the  notes  of  their  patrons  was 
arranged  between  the  two  banks.  The  Suffolk  Bank  with- 
drew from  the  system  on  November  i,  1858,  upon  the  ground 
that  ' '  its  main  feature,  the  right  to  send  home  bills  for  specie, 
cannot  be  given  up  without  destroying  its  efficacy,"  and 
that  "under  the  existing  circumstances  the  bank  does  not 
wish  to  stand  in  the  way  of  a  trial  of  the  attempted  experi- 
ment of  a  foreign  money  system  to  be  conducted  on  less 
stringent  principles."  The  Suffolk  Bank  continued  to 
receive  country  money  at  a  discount  of  twenty-five  cents 
per  $1000  and  to  share  to  this  degree  in  the  business  of 
redemption. 

The  circulation  of  the  New  England  banks  in  1858  was  less 
than  $40,000,000  and  the  redemptions  for  that  year  through 
the  Suffolk  Bank  were  1400,000,000.  Every  note,  therefore,  on 
the  average,  passed  through  the  redemption  agency  ten  times  a 
year,  or  a  little  less  often  than  once  a  month.  This  frequency 
of  redemptions  not  only  tested  the  solvency  of  the  banks  by 
the  ultimate  test  of  a  banking  currency,  but  it  kept  the  cir- 
culation constantly  adj  usted  to  business  conditions.  The 
redemptions  through  the  Suffolk  agency  were  $76,248,000 
in  1834  and  increased  to  $105,457,000  in  1837.  There  were 
fluctuations  during  the  period  of  specie  suspension,  but  the 
redemptions  increased  progressively  to  $137,000,000  in  1845, 
$220,000,000  in  1850  and  $341,000,000  in  1855,  until  they 
reached  their  maximum  of  $400,000,000  in  1858.  The  ex- 
penses of  carrying  on  the  redemption  agency  reached  a 
maximum  of  $40,000  in  1858,  making  an  average  expense 
of  ten  cents  per  $1000.  The  suspension  of  specie  payments 
by  the  banks  of  the  country  at  the  close  of  1861,  as  the  re- 
sult of  Secretary  Chase's  issue  of  government  demand  notes, 
arrested  the  regularity  of  redemptions  through  the  Suffolk 
system  and  it  was  superseded  before  resumption  by  the 
National  banking  system.  The  Suffolk  system  was  never 


322          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

sustained  by  formal  law,  but  it  maintained  New  England 
bank  currency  for  a  generation  at  par  with  gold  and  pre- 
vented any  losses  to  note-holders  larger  than  a  fraction  of 
one  per  cent,  of  the  entire  volume  of  circulation. 

New  York  tried  two  banking  systems  under  which  many 
strong  banks  were  created,  but  both  of  which  failed  in  some 
degree  through  defects  of  detail.  The  early  New  York 
banks  issued  notes  against  their  general  assets  and  were 
chartered  under  special  acts  of  the  legislature,  which  were 
granted  to  some  extent  as  political  favors.  The  Bank  of 
New  York  was  incorporated  by  Act  of  March  21,  1791,  after 
having  done  business  for  seven  years  under  articles  of  associ- 
ation drawn  by  Alexander  Hamilton.  This  bank  retained 
a  practical  monopoly  in  New  York  City  until  1799,  when 
the  Manhattan  Company  began  a  banking  business  with  a 
capital  of  $2,000,000.  The  charter  was  obtained  by  the 
management  of  Aaron  Burr  and  would  undoubtedly  have 
been  refused  by  the  Federalist  majority  in  the  legislature 
if  it  had  been  clearly  understood  that  it  carried  banking 
powers  ;  but  the  charter  was  granted  for  the  avowed  purpose 
of  supplying  the  City  of  New  York  with  pure  water  and 
cloaked  the  banking  power  under  a  general  provision  per- 
mitting the  company  to  employ  its  surplus  in  any  moneyed 
transactions  not  inconsistent  with  the  laws  of  the  State.1 
Six  additional  banks  were  chartered  up  to  1811  ;  nine  ad- 
ditional in  that  and  the  following  year,  after  the  lapse  of  the 
charter  of  the  Bank  of  the  United  States  ;  and  twenty-four 
more  from  1813  to  1825. 

Thirty  New  York  bank  charters  were  to  expire  between 
1829  and  1833,  and  Governor  Van  Buren  in  the  former  year 
urged  upon  the  legislature  a  sweeping  measure  of  reform. 
He  presented  what  is  known  as  "the  safety-fund  plan," 
which  he  stated  had  been  presented  to  him  by  Mr.  Joshua 
Forman  of  Syracuse.  Mr.  Forman  declared  that  ' l  The 
propriety  of  making  the  banks  liable  for  each  other  was 
suggested  by  the  regulations  of  the  Hong  merchants  in 
Canton,  where  a  number  of  men,  each  acting  separately, 

1  Roberts,  477. 


THE   STATE  BANKING   SYSTEMS.  323 

have,  by  a  grant  of  the  government,  the  exclusive  right  of 
trading  with  foreigners  and  are  all  made  liable  for  the  debts 
of  each  in  case  of  failure."  Mr.  Form  an  did  not  propose 
to  extend  this  principle  further  than  the  guarantee  of  the 
circulating  notes,  but  by  accident  or  design  the  bill  which 
passed  the  legislature  made  the  safety  fund  liable  for  all  the 
debts  of  a  failed  bank.  Each  bank  was  required  to  pay 
annually  to  the  Treasurer  of  the  State  a  sum  equal  to  one- 
half  of  one  per  cent,  of  its  capital  stock  until  the  payments 
should  amount  to  three  per  cent.  The  first  act,  approved 
April  2,  1829,  provided  for  the  distribution  of  the  assets  of 
a  failed  bank  in  the  usual  way  and  that,  after  all  the  assets 
had  been  turned  into  money  and  the  final  distribution  made, 
a  court  of  chancery  should  enter  an  order  showing  the 
amount  necessary  to  discharge  the  remaining  debts  and 
should  authorize  the  Comptroller  to  pay  the  amount  from 
the  bank  fund.  'This  law  was  modified  by  the  Act  of  May  8, 
1837,  to  enable  the  State  authorities  to  take  such  measures 
as  might  be  necessary  for  the  immediate  payment  of  the 
notes  of  any  insolvent  bank  whose  liabilities  in  excess  of 
assets  should  not  exceed  two- thirds  of  the  bank  fundX  It 
was  not  until  1842,  after  the  failure  of  nine  of  the  banks 
incorporated  under  the  safety  fund  system,  that  an  act  was 
passed  making  the  circulating  notes  only  a  charge  against 
the  safety  fund  and  leaving  the  other  liabilities  of  the  failed 
bank  to  be  paid  from  the  assets. 

The  panic  of  1837  put  the  safety  fund  to  its  first  test  and 
compelled  the  State  Comptroller  to  make  heavy  payments 
in  the  redemption  of  circulating  notes.  Three  important 
banks  in  Buffalo  failed  early  in  May,  1837,  with  a  reported 
circulation  of  $413,961.  The  Comptroller  announced  that 
their  bills  would  be  received  in  payment  of  canal  tolls  and 
other  debts  to  the  State  and  they  were  maintained  substan- 
tially at  par.  The  charters  of  two  banks  were  repealed  by 
the  Legislature  in  1837  and  their  notes  redeemed  by  the 
State,  but  one  of  these  charters  was  renewed  and  the  pay- 
ments from  the  safety  fund  were  reimbursed.  The  safety 
fund  was  practically  intact  in  1840  and  stood  at  $870,615. 


324          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

The  next  three  years  witnessed  eleven  failures,  which  prac- 
tically wiped  out  the  safety  fund  and  compelled  calls  upon 
the  solvent  banks  to  make  it  good.  The  redemption  of 
notes  was  suspended  after  the  first  four  failures,  because  the 
fund  was  deemed  no  more  than  sufficient  to  cover  their 
liabilities,  but  the  Act  of  1 842  permitted  the  banks  to  antici- 
pate their  annual  contributions  by  as  much  as  six  years  in 
some  cases  and  to  pay  into  the  fund  at  par  the  notes  of  the 
failed  banks.  The  banks  very  generally  took  advantage  of 
this  provision  and  made  a  good  profit  on  notes  of  the  failed 
banks  which  had  fallen  into  their  hands  at  a  considerable 
discount.  Their  advance  payments  did  not  involve  a  loss 
of  interest,  as  the  original  law  required  the  investment  of 
the  bank  fund  and  the  payment  of  interest  to  the  banks, 
and  the  Act  of  1842  granted  seven  per  cent,  interest  on  the 
advance  payments.  Redemptions  of  notes  up  to  September 
30,  1850,  were  $1,614,577  and  payments  to  other  creditors 
up  to  1851  were  $1,088,109. 

The  failure  of  the  L,ewis  County  Bank  in  November,  1854, 
with  deposits  of  only  $1,998  and  outstanding  notes  for  $148,- 
545,  found  the  safety  fund  no  longer  adequate  to  redeem 
circulation.  Future  contributions  up  to  1860  were  pledged 
for  the  redemption  of  the  public  stocks  which  had  been 
issued  to  obtain  ready  money  to  provide  for  previous  failures. 
The  notes  of  the  Lewis  County  Bank  were  finally  redeemed 
twelve  years  later  and  the  notes  of  the  three  banks  which 
failed  in  1857  were  provided  for  out  of  their  assets.  The 
total  contributions  to  the  safety  fund  from  its  creation  to  the 
abolition  of  the  system  were  $3,104,999. 

The  safety  fund  system  broke  down  primarily  because 
the  fund  was  made  to  cover  all  liabilities  instead  of  simply 
the  liability  for  note  issues.  The  fact  that  another  system 
was  adopted  for  banks  organized  after  1838  also  operated  to 
the  injury  of  the  safety  fund  system,  because  no  new  banks 
became  contributors  and  the  failure  and  withdrawal  of  some 
of  the  old  ones  gradually  reduced  the  number  over  whose 
resources  the  liability  was  distributed.  Another  evil  by 
no  means  inherent  in  the  safety  fund  system,  but  which 


THE   STATE  BANKING   SYSTEMS.  325 

increased  the  demand  upon  it,  was  the  issue  of  notes  by 
several  of  the  safety  fund  banks  in  excess  of  the  maximum 
allowed  by  law.  This  defect  was  remedied  in  1843  by  an 
act  providing  for  the  issue  of  notes  registered  and  counter- 
signed by  the  Comptroller  and  the  surrender  of  the  plates 
with  which  the  banks  were  then  printing  their  notes.  A 
mistake  was  made  also  in  basing  the  contributions  of  the 
banks  to  the  safety  fund  upon  their  capital  rather  than 
upon  their  outstanding  circulation.  But  the  arrest  of  the 
expansion  of  the  system,  the  over-issue  of  notes  in  viola- 
tion of  law,  and  the  distribution  of  the  assessment  in  pro- 
portion to  capital,  would  not  have  prevented  the  success  of 
the  safety  fund  system  if  the  fund  had  been  maintained 
exclusively  for  the  redemption  of  circulating  notes.  The 
fund  would  have  amply  secured  the  notes  of  the  New  York 
banks  and  ensured  their  prompt  redemption  at  par,  even 
without  the  reduplicated  security  aiforded  by  the  constitu- 
tion of  1846,  which  made  the  notes  a  first  lien  on  the  assets 
and  made  stockholders  liable,  to  the  amount  of  their  stock, 
for  the  debts  of  a  failed  bank  contracted  after  January  i, 
1850.  A  careful  estimate  shows  that  the  annual  assessment 
required  on  the  average  from  1829  to  1865  to  keep  the  fund 
good  and  redeem  every  dollar  of  the  circulation  of  suspended 
banks  would  have  been  less  than  one-fourth  of  one  per  cent, 
of  the  banking  capital,  or  about  three-eights  of  one  per  cent, 
on  the  average  outstanding  circulation.1 

Bank  charters  continued  to  be  granted  in  New  York  by 
special  acts  and  to  be  subject  to  political  favor  after  the 
adoption  of  the  safety  fund  plan  and  up  to  1838.  A  cam- 
paign for  free  banking, — in  the  sense  of  equal  right  to  all 
persons  complying  with  fixed  conditions, — was  waged  by 


'Root,  New  York  Bank  Currency,  " Sound  Currency,"  Vol.  II., 
No.  5,  p.  15.  Millard  Fillmore,  who  was  Comptroller  of  the  State  in 
1848,  showed  that  up  to  that  time,  covering  the  period  of  the  most 
numerous  failures,  the  contributions  to  the  safety  fund  had  been 
$1,876,063  and  the  outstanding  circulation  of  the  failed  banks  $1,548,- 
558,  leaving  a  surplus  of  $327,505,  if  the  fund  had  been  used  simply 
to  guarantee  circulation. 


326          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

the  Loco-Foco  Democrats  for  several  years  and  bore  fruit  in 
the  Free  Banking  Act  of  April  18,  1838.  Individuals  or 
associations  were  authorized  by  this  act  to  engage  in  the 
issue  of  notes,  which  were  to  be  delivered  to  them  by  the 
State  Comptroller,  upon  depositing  with  him  the  stocks  of 
the  United  States,  of  the  State  of  New  York,  or  of  any 
other  State  approved  by  the  Comptroller,  made  equal  to  a 
five  per  cent.  New  York  stock.  Provision  was  also  made 
for  issuing  notes  on  bonds  and  mortgages  on  improved,  pro- 
ductive and  unincumbered  real  estate  worth  double  the 
amount  secured  by  the  mortgage,  and  the  notes  were  to 
show  whether  they  were  secured  by  stocks  or  by  mortgages. 
The  mortgage  feature  of  the  law  opened  the  door  to  a  paper 
money  Saturnalia  as  dangerous  as  the  issues  of  L,aw's  Bank, 
the  assignats  of  the  National  Assembly,  or  the  I^and  Bank 
of  Norway  ;  but  fortunately  the  conditions  attached  to  the 
issue  of  notes  for  mortgages  were  somewhat  severe  and  such 
issues  never  attained  any  considerable  proportion  of  the 
aggregate  circulation  of  the  free  banks.  The  provision  for 
mortgages  as  a  basis  for  circulation  was  repealed  in  1863 
and  securities  for  note  issues  were  restricted  solely  to  stocks 
of  the  State  of  New  York  and  of  the  United  States. 

Individuals  as  well  as  associations  were  prompt  to  take 
advantages  of  the  free  banking  law  and  the  amount  of  capi- 
tal subscribed  by  January  i,  1839,  was  $10,838,175.  The 
actual  circulation  under  the  law  at  that  time  was  only 
$396,300,  but  the  circulation  had  increased  by  December 
i,  1839,  to  about  $5,ooo,ooo,  issued  by  seventy-six  persons 
or  associations,  with  fifty-seven  additional  applications 
pending.  Eight  of  these  banks  went  out  of  business 
before  January  i,  1841,  and  eighteen  more  followed  in  the 
course  of  the  next  year.  The  notes  were  redeemed  at  an 
average  discount  of  twenty  per  cent,  for  those  secured  by 
stocks  and  twenty-five  per  cent,  for  those  secured  by  stock 
and  real  estate.  The  results  of  the  sales  of  securities  up 
to  the  close  of  1850  showed  aggregate  receipts  of  $1,142,758 
upon  stocks  which  had  been  accepted  as  security  for  circula- 
tion to  the  amount  of  $1,468,245.  This  afforded  a  dividend 


THE  STATE  B Ah7 KING  SYSTEMS.  327 

of  about  77  per  cent,  upon  the  circulation  thus  redeemed. 
The  New  York  stgcks  sold  on  the  average  for  92.86  per 
cent.  ;  Michigan  stocks  came  next  at  72.95  per  cent.  ;  Indiana 
bringing  up  the  rear  at  49.08  per  cent. 

The  fact  that  individuals  could  issue  notes  under  the  free 
banking  law  upon  the  deposit  of  securities  led  to  many  vi- 
sionary efforts  to  exploit  credit  and  resulted  in  1844  in  legis- 
lation requiring  an  individual  banker  to  deposit  securities  to 
the  amount  of  not  less  than  $50,000  and  to  transact  business 
in  the  place  in  which  he  resided.  A  market  was  created  in 
New  York  for  a  time  for  securities  which  did  not  find  a 
ready  sale  elsewhere  and  quotations  for  such  securities  were 
strengthened,  but  this  market  was  destroyed  by  the  Act  of 
1840,  limiting  the  securities  thereafter  accepted  to  those  of 
New  York.  Such  changes  gradually  strengthened  the  sys- 
tem until  there  was  little  to  be  desired  on  the  single  ground 
of  security.  The  failures  during  the  first  twelve  years  of 
the  free  banking  system  showed  losses  of  $326,000,  or  only 
$27,200  per  year  on  an  average  circulation  of  about  $6,000,- 
ooo.  This  was  less  than  one-half  of  one  per  cent,  per  year 
and  the  losses  in  the  remaining  fifteen  years  of  the  operation 
of  the  system  averaged  only  $4800  per  year  on  a  circulation 
of  about  $22,000,000,  or  less  than  one-fortieth  of  one  per 
cent.  The  circulation  issued  under  the  free  banking  law 
was  not  a  strong  reliance,  however,  in  times  of  pressure  and 
was  threatened  at  such  times,  when  strength  was  most 
needed,  by  the  decline  in  securities.  It  had  little  elasticity 
and  did  not  meet  the  demands  of  the  business  community  in 
this  respect  nearly  so  well  as  the  circulation  of  the  safety 
fund  banks.  Defects  of  detail  were  gradually  eliminated, 
however,  and  the  system  was  successful  enough  to  attract 
attention  in  Canada  in  1850  and  to  become  the  model  of  the 
national  banking  system  of  the  United  States  in  1863. 

The  banking  laws  of  New  York  were  followed  also  in 
many  Western  States,  but  not   always   closely   enough   to 
assure  the  later  systems  the  solidity  of  the  original.     The 
State  Bank  of  Ohio,  created  in  1845,  was  one  of  the  best  of  \ 
these  institutions  and  its  note  issues  were  protected  by  a 


328          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

combination  of  the  safety  fund  and  security  principles.  The 
bank  was  not,  as  its  name  might  imply,  an  institution  of 
State,  but  was  owned  entirely  by  individuals  and  acted  as  a 
sort  of  board  of  control  for  the  branch  banks.  Bach  branch 
was  required  to  deposit  with  the  board  of  control  ten  per 
cent,  of  the  amount  of  its  circulating  notes,  either  in  specie 
or  in  the  bonds  of  the  State  or  the  United  States,  as  a  safety 
fund  for  the  protection  of  the  entire  note  issues  of  the  bank. 
Kach  branch  was  liable  for  the  circulation,  but  not  for  the 
other  liabilities,  of  the  other  branches.  The  reimbursement 
of  the  safety  fund  for  notes  redeemed  was  constituted  the 
first  lien  on  the  assets  of  a  failed  branch.  The  State  Bank 
of  Ohio  was  eminently  successful  and  was  managed  in  much 
the  same  way  as  the  State  Bank  of  Indiana.  The  aggregate 
capital  of  the  thirty-six  branches  in  1863  was  $4,054,700  ; 
circulation,  $7,246,513;  loans  and  discounts,  $8,653,459; 
deposits,  $5,631,629  ;  and  specie,  $2,216,982. 

The  State  of  Michigan  enacted  a  safety-fund  law  in  1836,"* 
but  it  was  forgotten  and  ignored  in  the  phrensy  of  paper  in- 
flation which  swept  over  the  State  during  the  next  few 
years.  The  first  session  of  the  State  legislature  in  1837] 
passed  a  general  banking  law,  which  was  followed  up  after 
the  panic  in  the  same  year  by  an  act  permitting  new  banks 
to  begin  business  in  a  condition  of  suspension  of  specie  pay- 
ments. Thirty  per  cent,  of  the  capital  was  required  to  be 
paid  in  specie,  but  this  provision  was  evaded  by  borrowing 
specie  for  a  few  days  when  the  bank  commissioners  made 
their  tours  of  inspection.  Any  twelve  free-holders  could 
form  a  bank  if  they  were  able  to  show  a  capital  of  $50,000, 
including  thirty  per  cent,  in  specie  and  the  remainder  in 
bonds  and  mortgages  approved  by  the  Auditor  General  of 
the  State.1  The  restraints  of  the  law  \vere  so  recklessly 
violated  that  the  State  was  soon  flooded  with  $1,000,000  in 
worthless  bills.  Banks  were  created  after  specie  resumption 
in  the  most  inaccessible  places,  that  their  notes  might  not  be 
presented  for  redemption  ;  and  Eastern  speculators  took  out 


Felch,  Senate  Ex.  Doc.  38,  52d  Cong.,  2d  Sess.,  76. 


THE   STATE  BANKING  SYSTEMS.  329 

Michigan  charters  and  issued  the  bills  in  other  States  where 
the  standing  of  the  banks  could  not  be  known.  "  They 
were  at  a  great  discount,"  says  Judge  Cooley,  "  as  compared 
with  Eastern  bills  ;  the  issues  of  one  bank  were  at  a  dis- 
count as  compared  with  those  of  another ;  merchants  kept 
couriers  by  whom  they  hurried  off  to  the  banks  of  issue  the 
bills  they  were  compelled  to  take,  that  they  might  if  possi- 
ble exchange  them  for  something  in  which  they  had  more 
confidence.  No  '  circulating  medium  '  ever  before  circulated 
so  rapidly."  Fraudulent  over-issues  were  frequent  and  in] 
many  cases  were  not  even  recorded.  Misery  and  bankruptcy' 
spread  over  the  State,  with  their  natural  sequence  of  stay 
laws  and  laws  fixing  the  value  at  which  the  property  of 
debtors  should  be  taken.  The  free  banks  were  nearly  all  in 
the  hands  of  receivers  when,  in  1844,  the  Supreme  Court  of 
the  State  decided  that  even  the  receiverships  had  no  legal 
existence,  for  the  general  banking  act  had  been  passed  in 
violation  of  the  constitutional  provision  regarding  corpora- 
tions, which  implied  the  necessity  of  a  separate  charter  in 
each  case. 

Banking  laws  basing  the  issue  of  notes  upon  securities 
were  adopted  by  Illinois  in  1851,  Indiana  in  1852,  Wisconsin 
in  1853,  and  other  States  soon  after.  The  restrictions  which 
experience  in  New  York  showed  to  be  necessary  to  protect 
note-holders  received  little  attention  in  the  West  and  the 
rapid  depreciation  of  the  ' '  red  dog  ' '  and  ' '  wildcat ' '  cur- 
rency cast  a  suspicion  upon  State  bank  issues  which  has 
survived  to  this  day.  Fifty-one  of  the  ninety-four  free 
banks  of  Indiana  suspended  before  the  panic  of  1857  and 
most  of  those  left  tumbled  like  a  house  of  cards  in  all  the 
States  when  the  pressure  came.  A  fictitious  market  was 
created  for  securities,  which  brought  prices  that  could  not 
have  been  otherwise  obtained,  and  the  stimulus  was -thus 
given  for  the  creation  of  public  debt  by  the  issue  of  securities, 
the  issue  of  bank-notes  on  the  securities,  the  purchase  of 
more  securities  to  be  used  as  the  pledge  of  new  bank-notes, 


1  Michigan,  272. 


33O          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

and  so  on  in  an  endless  chain  of  debt  creation  and  the  infla- 
tion of  paper  wealth.  It  was  usually  found  when  a  bank 
failed  that  the  securities  could  not  be  marketed  for  their 
face  value  and  in  many  cases  that  there  were  no  other  avail- 
able assets.  The  Bank  Comptroller  of  Wisconsin  reported 
as  late  as  1863  a  list  of  fifteen  failed  banks  whose  notes  he 
was  redeeming  at  rates  ranging  from  sixty  cents  to  ninety- 
five  and  a  half  cents  on  the  dollar.1  The  basis  of  redemp- 
tion, however,  was  not  coin,  but  United  States  Treasury 
notes,  themselves  depreciated  about  thirty  per  cent.,  so  that 
it  was  necessary  to  multiply  the  one  depreciation  into  the 
other  to  obtain  the  scanty  proceeds  in  coin  of  Wisconsin 
notes  based  upon  "securities."  Free  banking  laws  were 
passed  in  eastern  States,  but  the  system  made  little  headway 
in  those  States  against  the  established  credit  of  the  chartered 
banks. 

One  of  the  most  dismal  chapters  in  American  banking 
history  is  that  which  records  the  creation  and  collapse  of 
banks  owned  and  managed  by  the  States.  The  Federal 
Constitution  sought  to  close  the  door  against  issues  of  the 
legal  tender  paper  money,  which  had  worked  such  havoc 
with  prices  and  credit  during  the  Revolutionary  era,  by  the 
decree  that  no  State  should  "emit  bills  of  credit."  The 
Supreme  Court  sustained  the  force  of  this  prohibition  in  the 
case  of  Craig  vs.  the  State  of  Missouri  (4  Peters,  410),  and 
decided  that  the  certificates  issued  by  the  State  and  made 
receivable  for  salaries  and  taxes,  even  though  not  full  legal 
tender,  fell  under  the  ban  of  the  constitutional  restriction. 
A  different  spirit  ruled  the  court  when  the  case  of  Brisco  vs. 
the  Bank  of  the  Commonwealth  of  Kentucky  was  decided 
in  1837.  Chief-Justice  Marshall  had  just  died,  but  Justice 
Story,  who  dissented  from  the  majority  decision,  insisted 
that  his  dead  associate  had  agreed  with  him,  that  the  pend- 
ing case  could  not  be  distinguished  in  principle  from  that  of 
Craig  vs.  Missouri.  The  majority  found  a  distinction  in  the 
fact  that  the  bills  in  question  were  issued  by  a  bank  under 


of  the  Secretary  of  the  Treasury  on  Condition  of  the  Banks 
at  the  Commencement  of  1863,  204. 


THE   STATE  BANKING   SYSTEMS.  331 

the  direction  of  a  president  and  twelve  directors.  They  held, 
notwithstanding  the  fact  that  the  bank  was  exclusively  the 
property  of  the  State,  that  the  notes  were  not  "bills  of 
credit  "  within  their  definition,  which  included  only  "  paper 
issued  by  the  authority  of  a  State  on  the  faith  of  the  State, 
and  designed  to  circulate  as  money."  ' 

The  mania  for  banks  of  State  was  already  well  on  its 
course  before  this  decision  was  made.  The  Commonwealth 
of  Kentucky  had  been  part  owner  in  the  Bank  of  Kentucky, 
incorporated  in  1806,  and  owned  $586,400  of  the  capital 
stock  of  $2,726,100  when  the  charter  was  repealed  in  1822. 
The  Bank  of  Kentucky  was  hampered  throughout  its  career 
by  State  interference,  but  was  paying  specie  and  its  stock 
was  at  par  when  the  State  decided  to  set  up  a  rival  under  its 
own  exclusive  ownership  and  management.  The  new-comer 
was  the  Bank  of  the  Commonwealth  of  Kentucky,  chartered 
for  twenty  years  by  the  Act  of  November  29,  1820,  with  a 
capital  of  $2,000,000,  which  was  increased  December  22, 
1820,  to  $3,000,000.  The  State  availed  itself  of  the  power 
to  appoint  additional  directors  in  the  old  bank  to  pack  the 
board  with  pliant  tools,  who  soon  effected  its  ruin  for  the 
benefit  of  the  new  institution.  The  Bank  of  the  Common- 
wealth, however,  was  a  pitiable  failure.  Its  notes  had  fallen 
on  March  22,  1822,  to  sixty-two  and  a  half  cents  on  the  dol- 
lar and  they  continued  to  fall  until  the  entire  State  was 
embroiled  in  a  legal  controversy  which  almost  ended  in 


1  Brisco  vs.  Bank  of  Kentucky  is  reported  in  n  Peters,  257.  Prof. 
Simmer  declares  that  by  this  decision  "wildcat  banking  was  granted 
standing  ground  under  the  Constitution  "  and  that  "the  decisions  of 
the  Supreme  Court  on  the  constitutionality  of  the  Legal  Tender  Act 
must  have  borne  an  entirely  different  color,  if  Marshall's  opinion  had 
prevailed  in  Brisco's  case." — Andrew  Jackson,  363.  Judge  Story  went 
so  far,  in  his  Commentaries  on  the  Constitution,  as  to  intimate  that 
if  the  question  were  a  new  one,  it  would  be  doubtful  if  the  States 
had  power  under  the  Constitution  to  incorporate  banks  of  issue  ;  but 
it  is  obvious  that  the  permission  to  issue  notes,  circulating,  like  other 
commercial  paper,  upon  private  credit,  is  very  different  from  the 
issue  under  public  authority  of  legal  tender  money. — Kent,  Commen- 
taries, I.,  408. 


332          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

revolution.  The  hard  times  of  1818  had  resulted  in  the 
charter  of  fort)- -six  banks  with  a  total  capital  of  $8,720,000, 
but  the  demand  for  specie  by  the  United  States  Bank  drove 
them  to  the  wall  and  the  State  was  left  without  solvent 
banks.  A  more  permanent  legacy  of  the  hard  times  was  a 
replevin  law,  passed  in  1820,  which  gave  debtors  two  years 
within  which  to  redeem  their  goods  unless  payment  was  ac- 
cepted by  creditors  in  notes  of  the  Bank  of  the  Commonwealth. 

''The  relief  laws,"  of  which  the  replevin  law  was  one, 
became  the  political  issue  of  the  hour.  Judge  Clarke,  of  the 
Clarke  County  District  Court,  declared  one  of  the  provisions 
of  the  replevin  law  unconstitutional,  as  impairing  the  obli- 
gation of  existing  contracts.  The  Appellate  Court  sustained 
Judge  Clarke,  in  spite  of  an  effort  to  remove  him  by  an  ex- 
tra session  of  the  legislature,  but  the  relief  party  swept  the 
State  in  the  elections  of  1824,  repealed  all  laws  concerning 
the  Appellate  Court  and  created  a  new  Court  of  Appeals. 
The  Justices  of  the  old  court  took  the  ground  that  their 
offices  were  created  by  the  Constitution  and  could  be  abol- 
ished only  by  constitutional  amendment.  Their  records 
were  taken  from  them  and  kept  under  military  guard,  but 
the  old  court  continued  to  meet  and  decide  cases  alongside 
of  the  new.  The  next  electoral  campaign  found  the  people 
in  more  sober  mood.  The  "  Old  Court  party  "  elected  sixty 
members  of  the  legislature  against  thirty-five  of  the  "New 
Court  party,"  and  at  the  next  election  a  majority  of  the 
Senate  was  secured  and  a  bill  was  passed  in  December,  1825, 
over  the  veto  of  the  governor,  by  which  all  the  laws  consti- 
tuting the  new  court  were  repealed.1  An  act  was  passed  in 
1830  by  which  the  Bank  of  the  Commonwealth  ceased  to  loan 
money,  apparently  for  the  reason  that  no  one  cared  to  borrow 
the  sort  of  money  which  it  issued.  The  Commonwealth  of 
Kentucky  had  a  share  in  some  banks  afterwards  established, 
but  it  did  not  again  attempt  the  folly  of  State  management. 

The  State  of  Alabama  had  an  experience  with  a  bank  of 
vState  which,  according  to  Governor  Jones,  has  subjected  the 


Shaler,  178-84. 


THE   STATE  BANKING   SYSTEMS.  333 

people  to  a  permanent  tax  of  nearly  $1000  per  day  for  taxa- 
tion to  meet  the  cost  of  the  experiment.1  An  act  was 
passed  December  21,  1820,  to  incorporate  the  Bank  of  the 
State  of  Alabama,  but  it  provided  for  a  capital  of  $2,000,- 
ooo,  of  which  three-fifths  was  to  be  obtained  by  private 
subscriptions.  Subscriptions  were  slow  in  coming  and  the 
difficulty  was  met  by  an  Act  of  1823,  removing  any  limit 
upon  the  capital  and  providing  that  the  State  should  furnish 
the  whole.  Various  public  funds  were  set  apart  to  consti- 
tute a  part  of  the  capital,  among  them  the  proceeds  from  the 
sale  of  lands  donated  by  Congress  for  schools,  amounting  to 
about  $1,300,000,  and  the  funds  of  the  University  of  Ala- 
bama to  the  amount  of  about  $500,000.  These  grants  were 
only  a  beginning,  and  between  1832  and  1837  the  State 
issued  bonds  to  the  amount  of  $13,800,000  for  the  increase  of 
the  capital  of  the  bank  and  to  enable  it  to  resume  specie 
payments. 

The  purpose.of  the  founders  of  the  bank  was  to  distribute 
the  bank  money  as  evenly  as  possible  among  the  people  of 
the  State  and  the  original  act  stipulated  that  the  loans 
be  apportioned  among  the  several  counties  in  proportion  to 
their  representation  in  the  General  Assembly.  lyOans  to  a 
single  individual  or  corporation  were  not  to  exceed  $2,000, 
but  this  rule  was  not  closely  adhered  to  in  loans  to  the 
president  and  directors.  The  president  and  twelve  direc- 
tors were  chosen  by  the  General  Assembly  and  the  choice 
of  directors  for  the  branch  banks  increased  the  number 
annually  chosen  to  between  sixty  and  seventy.  Candidates 
for  the  assembly  were  compelled  to  promise  their  supporters 
liberal  loans  in  case  of  election  and  to  exact  pledges  from 
candidates  for  the  directorships  that  the  loans  should  be 
granted.  One  of  the  hotel  keepers  of  Tuscaloosa  succeeded 
in  securing  an  election  as  director  in  1832  and  his  hotel 
swarmed  with  members  of  the  legislature  and  persons 
desiring  to  borrow  money,  who  hoped  to  secure  his  support 
in  the  negotiation  of  loans.  Four  other  hotel  keepers 


Century,  Cheap  Money  Experiments,  88. 


334          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

realized  that  they  were  conducting  business  under  a  heavy 
handicap  and  secured  their  own  election  as  directors  in  1834. 
A  director  could  not  afford  to  refuse  a  discount  requested  by 
a  member  of  the  legislature  and  the  discounts  of  the  bank 
increased  from  $448,859  in  1826  to  $20,642,473  in  November, 
1837.  The  circulation  had  swelled  in  the  meantime  from 
$273,507  to  $6,676,050. 

Those  were  ' '  flush  times  ' '  in  Alabama  and  so  complete 
was  the  intoxication  of  the  people  with  the  paper  money 
craze  that  the  General  Assembly  on  January  9,  1836,  passed 
an  act  abolishing  direct  taxation  in  the  State  and  setting 
aside  $100,000  of  the  bank  money  to  defray  the  expenses  of 
the  State  government.  The  crisis  of  1837  led  to  an  investi- 
gation of  the  discounts  and  it  was  found  that  over  $6,000,000 
were  worthless.  Confidence  in  the  paper  money,  "  sup- 
ported by  the  faith  and  credit  and  wealth  of  the  State,"  to 
use  the  favorite  phrase  of  the  champions  of  government 
paper  money,  suddenly  collapsed  and  with  it  the  whole 
structure  of  business  and  credit  in  Alabama.  The  General 
Assembly  was  hastily  summoned  in  special  session  and 
authorized  a  loan  to  the  people  of  $5,000,000  in  bank  money, 
which  was  increased  by  $2,500,000  in  December ;  but  the 
fever  had  run  its  course,  the  charters  of  the  branch  banks 
were  repealed  in  1842,  and  the  charter  of  the  State  Bank  was 
not  renewed  when  it  expired  in  1845.  The  assets  of  the 
bank  netted  about  $10,000,000  towards  reducing  the  bonded 
debt  to  the  State,  but  $4,000,000  was  a  dead  loss,  in 
addition  to  the  public  funds  originally  set  aside  for  the  use 
of  the  bank.  The  effect  of  their  experiment  with  a  bank 
of  State  upon  the  people  of  Alabama  was  indicated  by  the 
provision  of  the  constitution  of  1867,  that  "The  State  shall 
not  be  a  stock-holder  in  any  bank,  nor  shall  the  credit  of 
the  State  ever  be  given  or  loaned  to  any  banking  company 
or  association  or  corporation. ' ' 

Mississippi  had  a  similar  experience.  Two  early  experi- 
ments in  State  ownership  with  bad  results  did  not  deter  the 
people  from  the  establishment  of  the  Union  Bank  of  Missis- 
sippi in  1838  with  a  capital  of  $15,000,000.  This  capital 


THE   STATE  BANKING  SYSTEMS.  335 

was  to  be  raised  by  means  of  loans  to  be  obtained  from  the 
directors  and  the  loans  were  to  be  negotiated  through  bonds 
of  the  State  for  which  the  credit  of  the  State  was  pledged. 
The  first  block  of  $5,000,000  in  bonds  was  sold  at  par  through 
Nicholas  Biddle,  president  of  the  Bank  of  the  United  States. 
The  bank  management  exercised  the  worst  possible  judg- 
ment in  loans  and  advances  and  the  bank  ran  its  course 
within  four  years.  Post  notes  were  issued,  on  account  of 
the  suspension  of  specie  payments,  and  the  issues  of  the 
bank  and  its  six  branches  had  increased  in  April,  1840,  to 
$3,337,665.  The  other  banks  vied  with  the  Union  Bank  in 
the  issue  of  currency  and  at  the  close  of  1839  the  twenty-six 
banks  in  the  State  professed  to  have  a  paid  up  capital  of 
$30,379,403,  loans  and  discounts  of  $48,333,728  and  a  circula- 
tion of  $15,171,639.  As  the  free  white  population  of  the 
State  at  that  time  was  only  170,000,  the  alleged  paid-up 
capital  equalled  $180  per  capita,  loans  and  discounts  $285, 
and  circulation  nearly  $90.  The  State  repudiated  her  obliga- 
tions on  the  bonds  issued  and  never  attempted  to  pay  them. 
The  results  upon  the  community  are  thus  set  forth  by  Mr. 
Henry  V.  Poor  :  ' 

The  $48,000,000  of  loans  were  never  paid  ;  the  $23,000,000  of  notes 
and  deposits  never  redeemed.  The  whole  system  fell,  a  huge  and 
shapeless  wreck,  leaving  the  people  of  the  State  very  much  as  they 
came  into  the  world.  Their  condition  at  the  time  beggars  description. 
Society  was  broken  up  from  its  very  foundations.  Everybody  was  in 
debt,  without  any  possible  means  of  payment.  Lands  became  worth- 
less, for  the  reason  that  no  one  had  any  money  to  pay  for  them. 
The  only  personal  property  left  was  slaves,  to  save  which,  such  num- 
bers of  people  fled  with  them  from  the  State  that  the  common  return 
upon  legal  processes  against  debtors  was  in  the  very  abbreviated  form 
of  "  G.  T.  T.," gone  to  Texas,— a  State  which  in  this  way  received  a 
mighty  accession  to  her  population. 

Several  other  Southern  and  Western  States  went  through   \ 
similar  experiences.     The  Union  Bank  of  Florida,  chartered 
by  the  territorial  government  on  February  12,  1833,  with  a 
capital  of  $1,000,000,  was  assisted  by  the  issue  of  State  bonds, 

1  Money  and  Its  Laws,  540. 


336          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

of  which  more  than  half  were  sold  in  Europe.  The  pro- 
ceeds were  loaned  on  stock  and  mortgages,  mainly  to  stock- 
holders, and  the  circulation  was  run  up  in  1839  to  $551,747. 
A  committee  of  the  legislature  made  an  investigation  in 
1840  and  their  report  was  very  unfavorable  to  the  bank. 
The  State  government,  after  the  admission  of  Florida  to  the 
Union,  refused  to  recognize  the  privileges  of  the  Union 
Bank  and  the  Secretary  of  State  reported  in  1858  that  its 
circulating  notes  were  worth  not  more  than  twenty  cents  on 
the  dollar.  A  real  estate  bank  was  one  of  the  features  of 
the  Arkansas  system,  towards  which  the  subscribers  to  the 
stock  were  required  to  pay  nothing  in,  but  merely  to  secure 
their  subscriptions  by  mortgaging  their  real  estate.  The 
working  capital  of  the  institution  was  obtained  by  the  issue 
of  State  bonds,  of  which  $2,000,000  were  authorized.  "  A 
prudent  expansion  of  the  currency  of  the  State  ' '  was  one 
of  the  avowed  objects  of  the  bank  and  loans  were  made 
within  a  year  after  opening  on  December  12,  1838,  amount- 
ing to  $1,585,190.  The  circulation  of  the  bank  at  this  time 
was  only  $156,910,  but  specie  payments  were  suspended  and 
circulation  was  increased  in  May,  1840,  to  $759,000.  The 
notes  suffered  a  discount  of  forty  to  forty-five  per  cent,  and  it 
was  soon  discovered  that  the  collection  of  loans  on  maturity 
was  a  far  different  matter  from  making  them.  The  directors 
made  an  assignment  on  April  2,  1842,  and  the  notes  of  the 
bank  afterward  passed  fcr  about  twenty-five  per  cent,  of 
their  face  value  in  specie.  A  like  experiment  had  been 
going  on  in  the  meantime  with  the  Bank  of  the  State  of 
Arkansas  and  the  total  amount  of  unredeemed  bonds  issued 
by  the  State  on  behalf  of  both  banks,  including  interest,  up 
to  October  i,  1868,  was  $4,993,503. 

Illinois  tried  several  experiments  at  issuing  money  upon 
"  the  credit  of  the  State,"  and  the  circulation  of  the  State 
Bank  of  Illinois,  incorporated  in  1821,  did  not  exceed  $300,- 
ooo.  Even  this  moderate  limit  did  not  keep  the  notes  from 
falling  within  three  years  to  twenty-five  cents  on  the  dollar, 
and  in  1825  an  act  was  passed  requiring  the  cashier  of  the 
bank  to  collect  all  the  signed  and  unsigned  notes  in  his  pos- 


THE   STATE  BANKING  SYSTEMS.  337 

session  and  burn  them  in  the  public  square  of  Vandalia,  in 
the  presence  of  the  governor  and  the  judges  of  the  Supreme 
Court.  The  next  State  Bank  was  incorporated  in  1835  and 
$2,000,000  of  the  capital  subscribed  by  the  State  was  paid  by 
the  issue  of  bonds,  which  were  taken  by  the  bank  at  par. 
Assistance  was  also  given  to  the  Bank  of  Illinois  at  Shaw- 
neetown,  but  both  banks  collapsed  in  1842  and  the  State  was 
saved  from  much  actual  loss  by  the  surrender  by  the  banks 
of  the  State  stock,  which  was  burned  in  the  Capital  Square 
at  Springfield  in  the  presence  of  the  legislature.  The  Con- 
stitution of  1848  provided  that  no  State  bank  should  there- 
after be  created  nor  should  the  State  own  any  banking  stock. 
Tennessee  authorized  a  State  Bank  in  1820,  which  issued 
$1,000,000  in  inconvertible  notes  in  loans  of  $500  each  upon 
real  estate  mortgages  worth  double  the  amount.1  The  notes 
quickly  dropped  below  par  and  the  bank  closed  in  1832. 

Louisiana  incorporated  the  Union  Bank  of  Louisiana  in 
1832  upon  similar  principles  with  those  of  the  Union  Bank 
of  Florida  and  issued  $7,000,000  in  State  bonds  to  provide 
the  capital.  Bonds  to  the  amount  of  $10,004,000  were  issued 
to  two  other  institutions,  but  all  three  failed  in  1842  and  the 
State  enacted  a  sound  banking  law,  under  which  she  became 
in  1860  the  fourth  State  in  the  Union  in  banking  capital  and 
the  second  in  specie  holdings.2  The  essential  feature  of  the 
law  was  the  requirement  that  the  liabilities  be  covered  one- 
third  by  specie  and  the  remaining  two-thirds  by  commercial 
paper  having  not  more  than  ninety  days  to  run.  Louisiana 
prohibited  State  subscriptions  for  bank  stock  in  her  constitu- 
tion of  1852.  Georgia,  Vermont,  Missouri,  Delaware  and 
the  Carolinas  all  tried  State  ownership  and  management  of 
banks,  but  the  first  two  early  abandoned  the  experiment. 
The  others  ceased  to  be  banks  of  issue  with  the  establish- 
ment of  the  national  banking  system.  The  Farmers'  Bank 
of  Delaware  was  never  much  under  political  influences  and 
is  still  conducted  as  a  bank  of  discount  and  deposit.  The 
Bank  of  Missouri  had  a  coin  reserve  of  one-third  of  its  cir- 

1  Knox,  Rhodes's  Journal  of  Banking,  Oct.,  1892. 

2  White,  Sound  Currency,  Vol.  II.,  No.  i,  p.  5. 


338          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

culation  and  its  connection  with  the  State  ended  in  1866  by 
the  sale  of  the  State  stock. 

The  State  Bank  of  Indiana  stands  out,  in  the  language  of 
Mr.  Horace  White,  a  ' '  notable  tribute  to  sound  banking 
principles  from  the  weltering  mass  of  bank  failures  of  the 
period  covered."  The  first  bank  of  State  was  created  origi- 
nally as  a  private  institution  and  adopted  by  the  constitu- 
tion of  the  State  upon  her  admission  in  1816  as  a  public 
bank.  The  experiment  was  a  failure  and  it  was  not  until 
1834  that  the  State  Bank  of  Indiana  was  incorporated,  with 
ten  branches.  The  parent  bank,  with  a  president  and  five 
directors  elected  by  the  legislature,  acted  as  a  sort  of  board 
of  control  over  the  branches,  each  of  which  was  organized 
with  a  capital  of  $160,000  and  chose  one  director  as  a  part 
of  the  board  of  control.  The  two  essential  differences  be- 
tween the  Bank  of  Indiana  and  the  other  banks  of  State  were 
the  payment  of  the  capital  in  actual  cash  and  the  issue  of 
notes  upon  liquid  assets.  The  State,  which  took  half  the 
capital  of  each  branch,  paid  its  proportion  in  silver  and  ad- 
vanced five-eights  of  the  private  capital  by  the  sale  of  five 
per  cent,  bonds  in  I^ondon,  taking  mortgage  security  for  the 
final  payment  by  the  shareholders  and  crediting  them  with 
the  dividends  paid  by  the  bank.  The  remaining  three- 
eights  of  the  private  capital  was  paid  in  cash  by  the  share- 
holders, and  each  shareholder  was  made  liable  for  an 
amount  equal  to  his  stock  and  the  branches  were  jointly 
liable  for  each  other's  debts.  The  bank  had  a  circulation  in 
1839  of  $2,951,594. 

The  State  Bank  maintained  a  high  credit,  but  was  unable 
to  obtain  the  renewal  of  its  charter  upon  its  expiration  in 
1857  because  of  a  provision  in  the  new  constitution  of  1851 
that  ' '  the  State  shall  not  be  a  stock-holder  in  any  bank  after 
the  expiration  of  the  present  bank  charter."  The  State 
realized  profits  of  $3,500,000  on  the  $1,000,000  invested  in 
the  institution,  and  its  management  had  done  so  much  for  the 
development  of  the  State  that  special  privileges  were  given 
to  a  new  State  Bank  of  Indiana  which  was  chartered  March 
3,  1855.  The  act  of  incorporation  was  quietly  carried 


THE   STATE  BANKING   SYSTEMS.  339 

through  by  a  syndicate  of  politicians,  who  became  large 
subscribers  to  the  stock  of  the  various  branches.  They 
opened  negotiations  with  the  managers  of  the  old  bank  for 
the  sale  of  the  franchises  and  the  latter  made  the  purchase 
upon  the  condition  that  Hugh  McCulloch,  who  had  been  for 
twenty  years  manager  of  the  old  Fort  Wayne  branch,  should 
be  made  the  president.  The  bank  weathered  the  crisis  of 
1857  without  suspending  specie  payments  and  rapidly  retired 
its  circulation  when  gold  went  to  a  premium  in  1862.  The 
bank  was  required  by  the  conditions  of  its  charter  to  pay  its 
notes  in  coin,  but  a  decision  was  obtained  from  the  Supreme 
Court  of  the  State  that  the  United  States  legal  tender  notes 
were  lawful  money  and  could  be  lawfully  used  for  the  re- 
demption of  the  notes.  The  circulation  was  reissued  upon 
this  basis,  but  upon  the  imposition  of  the  ten  per  cent,  tax 
on  the  circulation  of  State  banks  the  State  Bank  of  Indiana 
wound  up  its  affairs  with  ample  assets  and  unimpaired 
credit.1 

The  suspension  of  specie  payments  at  the  outbreak  of  the 
Civil  War  drove  gold  and  silver  from  circulation  and  required 
an  expansion  of  bank-note  issues  to  maintain  the  volume  of' 
the  currency.  The  Suffolk  system  continued  in  operation  at 
Boston,  but  the  notes  failed  to  flow  in  as  rapidly  as  before 
for  redemption.  The  fact  was  noted  and  commented  upon 
by  the  reports  of  the  bank  commissioners  of  Maine,  New 
Hampshire  and  Massachusetts  in  their  annual  reports  at  the 
close  of  1862  and  among  the  reasons  assigned  was  the  fact 
that  "in  the  present  unsettled  state  of  public  affairs,  the 
people  have  more  confidence  in  the  bills  of  the  local  banks 
than  in  any  other  paper  currency."2  Other  reasons  sug- 
gested were  the  large  sums  carried  by  soldiers  to  the  seat  of 
war  and  other  sums  left  to  be  expended  by  their  families, 
and  the  large  amount  of  Eastern  bills  sent  to  the  West  by 

1  McCulloch,  Ch.  xi.-xii. 

2  Report  of  the  Bank  Commissioners  of  Maine,  December  8,  1862, 
in  Annual  Report  of  the  Secretary  of  the  Treasury  on  the  Condition 
of  the  Banks  of  t!ie  United  States  at  the  Commencement  of  the  Year 
1863,  p.  3. 


340          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

New  York  banks,  to  fill  the  gap  created  by  the  winding  up 
of  local  institutions.  The  bank  commissioners  of  Massa- 
chusetts maintained  that  when  specie  payments  are  sus- 
pended, "  and  bills  are  no  longer  redeemable  in  gold,  a  great 
motive  for  sending  them  home  is  withdrawn,  since,  if  in  good 
credit,  they  are  as  valuable  as  anything  which  can  be  got  in 
exchange  for  them.  Men  hold  them  and  hoard  them,  there- 
fore, precisely  as  they  would  do  with  specie,  and  the  volume 
of  the  currency  becomes  greater  precisely  as  its  current  grows 
more  sluggish." 

It  was  very  generally  feared  that  the  banks  would  sell 
their  gold  at  a  profit  as  it  attained  a  high  premium  over  legal 
tender  paper,  but  the  New  England  banks  generally  held  on 
to  their  specie  as  a  provision  for  the  protection  of  their 
creditors  and  as  security  for  future  resumption.  The  com- 
missioner of  Maine  reported,  regarding  the  sale  of  specie 
for  a  premium,  that  "  No  instance  has  come  to  our  knowl- 
xedge  where  any  bank  has  done  anything  of  this  kind  ;  and 
certainly  it  cannot  have  been  practised  to  any  great  extent, 
for  the  comparative  tables  show  that,  notwithstanding  the 
suspension  act,  the  specie  in  our  banks  has  decreased  only 
some  $40,000."  The  New  Hampshire  commissioners  re- 
ported that  "  the  banks  have  not  only  kept  their  faith  with 
the  public,  in  retaining  their  specie  in  the  vaults,  but  have 
actually  increased  the  aggregate  amount  of  specie,  $38,827.52, 
or  more  than  twelve  per  cent."  The  Massachusetts  com- 
missioners undertook  to  discourage  sales  of  specie  and  de- 
clared that  they  ' '  regard  the  sale  of  gold  by  the  banks  as 
altogether  illegal,  so  long  as  they  refuse  to  pay  specie  on 
their  obligations. ' ' 

One  of  the  disadvantages  of  issuing  bank-note  circulation 
on  securities  was  disclosed  at  the  outbreak  of  the  war  in  the 
sudden  fall  in  value  of  Southern  State  bonds  pledged  by 
Northern  banks  to  secure  their  circulation.  This  shrinkage 
in  the  value  of  the  security  for  .the  notes  was  especially  felt 
in  Wisconsin.  The  case  of  the  Koshkonong  Bank,  whose 
stock  amounted  at  par  to  $48,000,  of  which  all  but  $3,000 
was  issued  by  Southern  States,  was  one  of  the  worst,  but 


THE   STATE  BANKING  SYSTEMS.  341 

was  typical  of  many  others.  The  net  proceeds  of  the  bonds, 
when  sold  in  the  New  York  market,  were  only  $21,769  and 
afforded  the  billholders  only  fifty-four  and  three-fourths  per 
cent,  on  the  dollar  against  an  apparently  well  secured  cir- 
culation of  $39,779.  The  Bank  Comptroller  of  Wisconsin 
was  compelled  to  call  upon  nearly  all  the  banks  to  make 
good  the  depreciation  of  stocks  and  their  position  became 
so  precarious  that  a  joint  resolution  was  passed  by  the  legis- 
lature on  February  15,  1861,  suspending  further  calls  for 
additional  securities.  The  Comptroller  declared  that  "a 
general  failure,  involving  three-fourths  of  all  the  banks,  was 
imminent  unless  relief  in  some  shape  was  granted  ;  and  there 
is  scarcely  any  occasion  for  doubt  but  at  least  eighty  out  of 
the  one  hundred  and  nine  then  existing  banks  would  have 
failed." 

The  resolution  of  February  was  rescinded  early  in  April 
and  another  call  was  made  upon  the  banks  to  bring  up  the 
value  of  their  stocks.  Thirteen  banks  failed  to  respond  and 
resisted  the  action  of  the  Comptroller  in  the  courts.  The 
stronger  banks  gradually  replaced  Southern  securities  by 
those  of  Northern  States  and  continued  business  upon  this 
basis  until  the  establishment  of  the  national  banking  system. 
A  shrewd  stock  jobbing  scheme  was  put  in  operation  by 
some  of  the  bankers  in  the  meantime  by  buying  up  depreci- 
ated currency  at  a  great  discount  and  offering  it  to  the 
Comptroller  for  redemption  in  the  better  class  of  bonds, 
which  could  then  be  sold  at  a  handsome  margin  over  the 
cost  of  the  currency.  The  Comptroller  refused  to  permit 
the  withdrawal  of  bonds  except  in  such  a  way  as  to  leave 
the  better  bonds  in  the  custody  of  the  State  as  security  for 
the  remaining  circulation,  but  he  modified  this  policy  when 
he  found  speculators  holding  on  to  the  notes,  in  anticipation 
of  their  final  redemption  from  the  proceeds  of  the  stock,  and 
surrendered  good  and  bad  stocks  in  fixed  proportions. * 

The  New  England  banks  felt  the  pressure  of  the  repudia- 

1  Report  of  G.  Van  Steenwyck,  Bank  Comptroller  of  Wisconsin, 
Madison,  October  I,  1861.  House  Ex.  Doc.  25,  37th  Cong.,  3d  Sess., 
190-94. 


342          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

tion  of  Southern  obligations,  but  they  had  been  preparing 
for  it.  Deposits  fell  in  Boston  from  $20,811,889  on  October 
8,  1860,  to  $17, 176, 778  on  December  lotH,  and  specie  reserves 
fell  on  December  i7th  to  $3,491,348, — far  below  the  limit  re- 
quired by  law.  The  whole  amount  of  Southern  indebted- 
ness to  the  North  was  estimated  by  intelligent  merchants  in 
New  York  and  Boston  at  $200,000,000,  and  a  large  part  of 
it  was  lost  by  the  breaking  out  of  war.1  The  Boston  banks, 
however,  succeeded  in  restoring  their  specie  reserves  by 
March,  1861,  to  $5,601,871,  and  the  manner  in  which  the 
banks  of  the  State  met  their  losses  is  thus  described  by  the 
bank  commissioners: 

The  system  pursued  by  them  for  many  years,  of  making  an  annual 
reservation  of  a  portion  of  their  yearly  earnings,  had  in  some  measure 
protected  them  against  unusual  amounts  of  dishonored  and  worthless 
paper.  By  the  bank  returns  on  the  last  Saturday  of  October  1860, 
the  net  profits  then  on  hand  amounted  to  $6,360,539.  n,  or  9T\per  cent, 
of  the  aggregate  banking  capital  of  the  Commonwealth.  And  we  do 
not  hesitate  to  express  the  opinion,  based  upon  the  examinations  we 
have  made  during  the  past  year,  and  from  information  specially  ob- 
tained from  other  banks,  principally  in  Boston,  that,  notwithstanding 
the  losses  which  some  banks  must  inevitably  sustain,  the  whole 
amount  of  final  loss  growing  out  of  our  difficulties  with  the  South 
will  be  more  than  covered  by  the  general  surplus,  thus  leaving  the 
aggregate  bank  capital  free  and  unimpaired.2 


1  Some  estimated  it  at  $200,000,000  to  New  York  alone. — Rhodes, 
III,  560.     The  honorable  conduct  of  the  New  Orleans  banks  is  pleas- 
antly referred  to  by  Secretary  Hugh  McCulloch.     The  branches  of  the 
Bank  of  Indiana  in  the  southern  part  of  the  State,  he  says,  "had 
large  dealings  with  men  who  were  engaged  in  the  Southern  (Missis- 
sippi) trade,  and  when  measures  were  being  instituted  for  the  seces- 
sion of  Louisiana  from  the  Union,  and,  indeed,  after  the  ordinance  of 
secession  had  been  adopted,  these  branches  had  large  cash  balances 
and  large  amounts  of  commercial  paper  in  the  New  Orleans  banks. 
Against  the  remonstrances  of  the  secession  leaders,  and  in  disregard 
of  threatened  violence,  these  cash  balances  and  the  proceeds  of  the 
commercial  paper  as  it  matured  were-  remitted  for  according  to  direc- 
tions,—not  a  dollar  was  withheld."— Men  and  Measures  of  Half  a 
Century,  139. 

2  House  Ex.  Doc.  25,  37th  Cong.,  3d  Sess.,  50. 


THE   STATE  BANKING   SYSTEMS. 


343 


The  growth  of  the  capital  and  business  of  the  State  banks 
of  circulation  is  shown  in  the  following  table  : 


YEAR. 

NO.  OF 
BANKS. 

CAPITAL  STOCK. 

LOANS  AND  DISCOUNTS. 

DEPOSITS. 

1834 

506 

$200,005,944 

$324,119,499 

$  75,666,986 

1835 

704 

231,250,337 

365,163,834 

83,081,365 

1836 

7^3 

251,875,292 

457,506,080 

115,104,440 

1837 

788 

290,772,091 

525,115,702 

127,397,185 

1838 

829 

317,636,778 

485,631,687 

84,691,184 

1839 

840 

3->7,i32,5i2 

492,278,015 

90,240,146 

1840 

9OI 

358,442,692 

462,896,523 

75,696,857 

1841 

784 

313,608,959 

386,487,662 

64,890,101 

1842 

692 

260,171,797 

323,957,569 

62,408,870 

1843 

69I 

228,861,948 

254,544,937 

56,168,628 

1844 

696 

210,872,056 

264,905,814 

84,550,785 

"1845 

707 

206,045,969 

288,617,131 

88,020,646 

1846 

707 

196,894,309 

312,114,404 

96,913,070 

1847 

715 

203,070,622 

310,282,945 

91,  792,533 

1848 

751 

204,838,175 

344,476,582 

103,226,177 

1849 

782 

207,309,361 

332,323,195 

91,178,623 

1850 

824 

217,317,211 

364,204,078 

109,586,595 

1851 

879 

227,807,553 

413,756,799 

128,957,712 

1853 

750 

207,908,519 

408,943,758 

145,553,876 

1854 

,208 

301,376,071 

557,397,779 

188,188,744 

1855 

,307 

332,177,288 

576,144,758 

190,400,342 

1856 

,398 

343,874,272 

634,183,280 

212,705,662 

1857 

,416 

370,834,686 

684,456,887 

230,351,352 

1858 

,422 

394,622,799 

583,165,242 

185,932,049 

1859 

,476 

401,976,242 

657,183,799 

259,568,278 

1860 

,562 

421,880,095 

691,945,580 

253,802,129 

"1861 

,601 

429,592,713 

696,778,421 

257,229,562 

1862 

,492 

418,139,741 

646,677,780 

296,322,408 

1863 

,466 

405,045,829 

648,601,863 

393,686,226 

Tradition  has  handed  down  unhappy  memories  of  the  State 
banks,  which  have  been  distorted  by  the  lapse  of  time  into 
conceptions  very  different  from  the  facts.  The  several  sys- 
tems, taken  in  the  aggregate  for  the  entire  country,  had  the 
great  practical  defect  of  lack  of  uniformity.  This  defect 
was  great  enough  to  obscure  the  essential  merits  of  many  of 
the  State  systems  and  to  make  any  system  which  was 
national  in  its  scope  and  uniform  in  its  character  attractive 
to  the  business  community  of  the  whole  country.  Whatever] 
the  merits  or  defects  of  the  State  systems,  the  currency  in 
circulation  was  judged  by  the  worst  of  the  systems,  for  by 
the  operation  of  Gresham's  law  that  currency  tended  to  drive  j 


344          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

out  of  circulation  all  kinds  which  were  superior  ;  and  even 
where  this  was  prevented  by  laws  or  local  conditions,  the 
bad  currency  was  a  constant  source  of  irritation  from  the 
very  necessity  of  discriminating,  in  receiving  money  pay- 
ments, between  the  bad  and  the  good.  One  of  the  require- 
ments of  the  modern  business  world  is  undoubtedly  a 
uniformity  of  currency  which  shall  obviate  the  necessity  for 
discrimination  and  make  every  dollar  of  equal  exchange 
value  with  every  other.  This  condition  was  not  met  by  the 
aggregate  of  State  currencies  and  the  fact  that  it  was  fully 
met  by  the  New  Kngland  currency  at  its  best  may  easily 
have  been  obscured,  in  the  minds  of  New  Englanders,  by 
the  multiplicity  of  good  and  bad  currencies  from  other  sec- 
tions which  caused  perpetual  inconvenience. 

The  national  banking  system  of  later  years  garnered  up 
the  lessons  of  many  experiments  with  banking  upon  securi- 
ties, adopted  most  of  the  good  and  discarded  most  of  the 
bad  features,  and  afforded  the  country  two  of  the  great  bene- 
fits of  a  sound  currency, — security  and  uniformity.  The 
necessity  of  discrimination  between  currencies  ceased  when 
every  dollar  in  circulation  rested  upon  a  common  basis, — the 
credit  of  the  national  government.  The  necessity  of  paying 
high  exchange  rates,  or  surrendering  the  notes  of  distant 
banks  at  a  heavy  discount,  ceased  also  when  every  note 
became  as  good  in  one  part  of  the  Union  as  in  another. 
Coupled  with  these  great  benefits  of  the  new  system  was  the 
feature  of  Federal  supervision  and  examination,  which 
arrested  the  creation  of  fraudulent  banks  at  the  outset  and 
subjected  them  annually  or  oftenerto  the  power  of  visitation 
by  the  national  authority.  Thethree  great  benefits, — secur- 
ity, saving  of  exchange,  and  Federal  supervision, — are  al- 
most inherent  parts  of  a  national  system.  The  fact  that 
they  have  been  associated  with  a  particular  national  system 
has  led  many  to  believe  that  there  can  be  no  other  equally 
good,  and  that  enmity  to  the  present  banking  law  is  enmity  to 
the  principles  of  sound  finance.  '  But  all  these  benefits  can 
be  obtained  under  national  law  with  the  added  benefits, 
which  the  present  system  lacks,  of  a  banking  currency  ample 


THE   STATE  BANKING   SYSTEMS.  345 

for  the  demands  of  business,  without  the  help  of  government 
paper  money,  and  flexibly  responsive  to  those  demands. 

The  foundation  of  a  national  currency  upon  evidences  of 
public  debt  is  dangerous  and  unscientific  and  proved  fatal  to 
some  of  the  State  currencies  before  the  Civil  War.  A  com- 
parison of  the  State  systems  shows  a  distinct  line  of  cleavage 
which  is  far  from  favorable  to  the  principles  of  the  present 
national  banking  law.  This  line  of  cleavage  separates  the 
banks  issuing  currency  against  general  assets,  like  those  of 
New  England,  Indiana,  and  Louisiana,  from  those  issuing 
circulation,  on  the  other  hand,  against  securities,  like  the 
banks  of  New  York,  Illinois,  and  Wisconsin,  and  those 
established  under  the  parental  care  of  the  State,  like  the 
Bank  of  the  Commonwealth  of  Kentucky,  the  Union  Bank 
of  Florida,  the  State  Bank  of  Alabama,  and  the  Bank  of 
Mississippi.  The  experience  of  the  New  England  and 
Indiana  banks  is  the  triumphant  vindication  of  the  principle 
of  banking  on  general  assets  and  issuing  notes  redeemable 
in  coin  on  demand,  which  is  supported  by  the  critics  of  the 
present  national  system  and  the  advocates  of  a  banking 
currency.  The  banks  issuing  circulation  on  securities,  with 
their  pitiable  failures  and  their  wildcat  banking,  were  the 
prototypes  of  the  national  system  and  afford  a  hint  of  what 
that  system  would  become  if  note  issues  based  upon  State 
and  municipal  securities  were  substituted,  as  is  sometimes 
proposed,  for  note  issues  based  upon  national  bonds.  It 
must  be  remembered,  moreover,  that  perfect  as  the  secur- 
ity seems  for  bank-notes  under  the  national  system,  it  is  a 
security  which  has  followed  the  ups  and  downs  of  govern- 
ment paper  money.  There  was  neither  purpose  nor  pretence 
of  maintaining  the  notes  of  national  banks  at  parity  with 
coin  while  the  notes  of  the  government  itself  and  the  bonds 
by  which  bank-notes  were  secured  were  depreciated.  Bank- 
notes remained  from  1864  to  1879  at  par  with  government 
obligations  because  those  obligations  themselves  were  far 
below  par  in  coin. 

If  the  banks  issuing  circulation  upon  securities  were  the 
model  for  the  national  banks  of  to-day,  the  banks  of  State7 


346          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

which  existed  before  the  war  were  the  models  and  the 
prototypes  of  the  Federal  treasury  management  under  the 
regime  of  legal  tender  paper.  Their  issues  were  not  bank- 
notes in  the  sense  in  which  banking  currency  is  opposed  to  a 
government  paper  currency,  but  they  were  simply  the  bills 
of  credit  of  the  State  resting  upon  the  credit  of  the 
State  as  completely  as  the  paper  roubles  of  the  Bank  of  Rus- 
sia. The  fact  that  they  were  hardly  ever  maintained  at  par 
in  coin,  in  spite  of  the  great  wrealth  and  undoubted  hon- 
esty and  good  faith  of  the  people  of  the  various  common- 
wealths, is  a  practical  demonstration  of  the  folly  of  attempting 
to  do  a  banking  business  upon  general  credit  without  quick 
assets.  The  lesson  of  the  history  of  the  State  banking  sys-  „ 
terns,  reduced  to  its  simplest  terms,  is  the  success  of  the 
systems  based  upon  the  banking  principle  and  the  failure  of 
the  systems  based  upon  the  deposit  of  securities,  like  the 
national  banking  system,  or  based  simply  upon  the  public 
credit,  like  the  government  currency  system  of  the  United 
States. 

One  of  the  essential  errors  of  early  banking  in  the  Unite'd 
States  was  the  undue  expansion  of  credit  upon  slender  re- 
sources. It  is  an  error  common  in  a  new  country  and  one 
from  which  the  United  States  and  Australia,  in  more  recent 
years  and  under  other  systems  of  note  issue,  have  not  been 
exempt.  The  impression  has  been  assiduously  cultivated 
by  the  opponents  of  a  banking  currency  that  the  early 
American  banks  issued  a  volume  of  circulating  notes  enor- 
mously in  excess  of  the  legitimate  demands  of  business. 
This  impression  is  absolutely  unfounded  and  the  proof  is 
afforded  by  the  figures.  Some  of  the  State  banking  cur- 
rencies were  over-issued  in  the  sense  that  every  dollar  which 
is  not  kept  at  par  with  the  metallic  standard  is  improperly 
issued,  but  the  aggregate  banking  currency  of  the  country 
was  at  no  time  over-issued  in  the  sense  that  an  equal  volume  I 
of  good  money  was  not  capable,  of  ready  and  healthy  absorp-  j[ 
tion  by  the  legitimate  demands  of  business.  The  circulation 
of  all  forms  of  money  in  the  United  States  between  1 880  and 
1895  nas  ranged  between  $21.71  and  $24.44  and  has  only 


THE   STATE  BANKING  SYSTEMS. 


347 


recently  been  regarded,  with  the  slackening  of  business  ac- 
tivity, as  beyond  the  volume  required  by  business  needs.  It 
is  only  necessary  to  compare  such  figures  with  those  of  the  cir- 
culation prior  to  the  Civil  War  to  show  how  erroneous  is  the 
assertion  that  the  currency  was  unduly  inflated  in  volume 
during  the  years  of  State  banking.  The  following  table 
shows  the  circulation  of  both  bank-notes  and  specie  at  vari- 
ous dates,  including  the  years  of  largest  circulation, — the 
difference  between  the  bank-note  circulation  and  the  total 
money  in  circulation  representing  the  specie  : 


YEAR. 

ESTIMATED  BANK- 
NOTES OUTSTANDING. 

TOTAL  NOTES  AND 
MONEY  IN  CIRCULA- 
TION. 

POPULATION. 

CIRCULA- 
TION PER 
CAPITA. 

l800 

$     10,500,000 

$    26,500,000 

5,308,483 

$4-99 

I8l0 

28,OOO,OOO 

55,000,000 

7,239,881 

7.60 

1820 

44,8OO,OOO 

67,100,000 

9,633,822 

6.96 

1830 

61,000,000 

87,344,295 

12,866,020 

6.69 

1835 

103,692,495 

145,799,637 

14,786,000 

9.86 

1837 

149,185,890 

217,185,890 

1  5,  655,000 

I3-87 

l84O 

106,968,572 

186,305,488 

17,069,453 

lO.gl 

1845- 

98,603,711 

177,950,405 

19,878,000 

8-95 

1850 

131,366,526 

278,761,982 

23,191,876 

12.02 

1853 

I88,l8l,000 

402,238,107 

25,615,000 

15.80 

1854 

204,689,207 

425,551,240 

26,433,000 

16.10 

1855 

186,952,223 

4l8,O2O,247 

27,256,000 

15-34 

I856 

195,747,950 

425,846,625 

28,083,000 

I5.l6 

1857 

214,778,822 

457,068,708 

28,916,000 

I5.8I 

1858 

155,208,344 

4O8,8lO,O28 

29,753,000 

13.78 

1859. 

I93,306,8l8 

438,967,542 

30,596,000 

14-35 

1 

CHAPTER  XV. 

THE    NATIONAL   BANKING    SYSTEM. 

State  of  the  National  Finances  at  the  Beginning  of  the  War — The 
Suspension  of  Specie  Payments  and  the  Loan  Policy  of  Secretary 
Chase-^Xhe^First  "Plans  for  the  National  Banking  System — 
Changes  in  the  Circulation — Tlie__Necessity  for  a  New  System 
and  the  Plan  of  Secretary  Carlisle— Recommendations  of  Comp- 
troller Bckels. 

THE  national  banking  system  of  the  United  States  had 
its  origin  in  the  management  of  the  finances  during 
the  Civil  War.  The  system  was  hardly  in  operation 
until  the  war  was  two-thirds  over,  but  it  offered  a  market 
for  the  public  securities  which  Contributed  materially  to 
raise  their  price  in  the  depreciated  paper  with  which  the 
government  discharged  its  obligations.  The  system  afforded 
the  country  for  some  years  a  currency  having  the  advantages 
of  uniformity  and  security,  and  possessed  in  these  respects  a 
great  advantage  over  the  bank  currency  of  the  different 
States  which  had  before  been  in  use.  The  national  bank- 
ing system,  however,  great  as  were  its  services  in  absorbing 
the  evidences  of  the  public  debt,  always  lacked  the  essential 
feature  of  a  purely  banking  currency.  The  currency  was 
without  elasticity,  in  the  sense  of  responsiveness  to  the 
demands  of  business,  and  the  volume  fluctuated  only  with 
the  price  of  securities.  The  gradual  reduction  of  the  public 
debt  has  removed  the  basis  for  national  bank-note  circulation 
until  it  has  become  but  a  trifling  factor  in  the  currency  sys- 
tem of  the  country,  and  a  strong  demand  has  arisen  for  the 
separation  of  the  note  issues  from  public  securities. 

348 


THE  NATIONAL  BANKING  SYSTEM.  349 

The  United  States  at  the  outbreak  of  the  Civil  War  were 
conducting  their  financial  operations  through  the  independ- 
ent Treasury.  The  notes  of  the  State  banks  formed  a  large 
part  of  the  medium  of  exchange  in  private  transactions,  but 
only  specie  was  accepted  in  payments  to  the  government. 
The  aid  of  the  banks  was  not  sought  in  handling  funds,  in 
making  transfers,  in  placing  loans,  or  in  paying  interest. 
This  at  least  was  the  theory  of  the  independent  Treasury, 
although  in  fact  the  absence  of  proper  depositaries  led  many 
public  officers  to  deposit  their  funds  temporarily  in  the  banks 
at  their  own  risk.1  The  circulation  of  the  country  outside 
of  the  Treasury  on  July  i,  1861,  consisted  of  $246,400,000 
in  specie  and  $202,005,767  in  the  notes  of  State  banks, 
making  a  total  of  $448,405,767,  or  $13.98  per  capita.3  The 
essential  question  for  Mr.  Chase,  Lincoln's  Secretary  of  the 
Treasury,  was  whether  the  operations  of  a  great  war  could 
be  carried  on  through  these  instrumentalities.  The  question 
was  the  occasion  of  much  discussion  at  the  time  and  has  never 
been  answered  to  the  satisfaction  of  all  sides.  The  answer  of 
Mr.  Chase  was  that  the  operations  of  the  war  could  not 
be  carried  on  upon  a  basis  of  specie  and  State  bank  paper. 

The  government  was  obliged  almost  at  the  outset  to  abandon 
the  position  that  it  was  able  to  carry  on  its  own  finances  with- 
out the  help  of  the  banks.  Some  small  loans  had  been  placed 
by  public  subscription  during  the  administration  of  Buchanan, 
but  it  was  perfectly  obvious  that  great  sums  could  not  be 
obtained  quickly  except  from  the  banks,  which  had  the 
keeping  of  the  transferable  capital  of  the  country.  Secre- 
tary Chase  held  a  conference  in  New  York  on  August  9, 
1 86 1,  with  representative  bankers  of  New  York,  Philadel- 
phia, and  Boston.  They  agreed  to  advance  to  the  Treasmy 
$150,000,000  in  gold,  to  be  secured  by  three-year  notes  bear- 
ing interest  at  7.30  per  cent.,  and  to  be  reimbursed  as  the 
proceeds  of  the  sale  of  bonds  were  covered  into  the  Treasury. 
This  union  of  the  banks  of  New  York,  Boston,  and  Phila- 
delphia in  support  of  the  public  credit  was  one  of  the  most 

1  Kinley,  60-61. 

2  Finance  Report,  1894,  p.  cviii. 


350          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

important  events  of  the  war  and  committed  the  conservative 
business  element  conclusively  to  the  side  of  the  Union  and 
the  policy  of  coercion  of  the  seceded  States.  The  banks  of 
the  three  big  Kastern  cities  had  an  aggregate  capital  of 
$120,000,000,  a  circulation  of  $115,964,749,  deposits  of  $125,- 
617,207,  and  coin  reserves  of  $63,165,039,  the  latter  being 
equal  to  forty-five  per  cent,  of  demand  liabilities.1  They 
had  already  made  an  agreement  in  November,  1860,  when 
secession  compelled  them  to  contract  their  business  and  pre- 
pare for  a  period  of  stress,  for  issuing  clearing  house  certifi- 
cates and  making  the  specie  of  all  the  banks  available  as 
a  common  fund.2 

Congress  passed  an  Act  on  August  5,  1861,  relaxing  the 
provisions  of  the  sub-treasury  law  so  far  as  to  permit  the 
Secretary  of  the  Treasury  to  deposit  any  money  obtained 
from  loans  to  the  credit  of  the  United  States  Treasurer  in 
such  solvent  specie-paying  banks  as  he  might  select.3     The 
banks  accepted  this  law  as  authority  for  the  use  of  the  ordi; 
nary  means  of  commercial  exchange, — bank-notes,  checks, 
and  drafts, — in  the  transactions  of  the  government.     They, 
recommended  to  the  Secretary,   therefore,  that  he   should 
take  the  proceeds  of  the  advances  made  by  the  banks  by 
drawing  checks  and  drafts   upon  the   banks,   in   favor  of 
public  creditors.     They  suggested  that  this  would  not  only 
prove  of  great  practical  convenience,  but  would  diminish 
the  hoarding  which  would  take  place  if  the  banks  paid  out 
their  coin  and  reduced  their  reserves  while  uneasiness  as  to 
the  future  prevailed  in  the  business  community.     Secretary 
Chase,   to  the  surprise  of  nearly  every  financier,  declared, 
that  the  Act  of  August  5th  had  no  such  meaning  or  intent, 
and  that  he  should  require  payment  of  the  advances  in  coin.. 
The  subject  was  warmly  discussed  between   the   Secretary 
and  the  bankers,  but  the  Secretary's  purpose  was  unshaken 
and  the  banks  yielded   rather  than  break  off  negotiations 
so  important  to  the  maintenance  of  the  public  credit. 

1  Poor,  557. 

<J  Bolles,  III,,  23. 

3  Acts  of  Thirty-seventh  Congress,  1st  Sess.,  Ch.  46,  Section  6. 


THE  NATIONAL  BANKING  SYSTEM.  351 

One  of  the  acts  of  the  special  session  of  Congress  in  the 
summer  of  1861  authorized  loans  in  several  forms,  including 
non-interest  bearing  notes  of  denominations  less  than  $50, 
payable  on  demand  by  the  assistant  treasurers  at  New  York, 
Boston,  and  Philadelphia.  These  notes  were  not  made  legal 
tender  and  Secretary  Chase,  in  recommending  them,  declared 
that  "The  greatest  care  will,  however,  be  requisite  to  pre- 
vent the  degradation  of  such  issues  into  an  irredeemable 
paper  currency,  than  which  no  more  certainly  fatal  ex- 
pedient for  impoverishing  the  masses  and  discrediting  the 
government  of  any  country  can  well  be  devised."  Notwith- 
standing this  brave  language,  the  Treasury  tiegan  to  issue 
the  new  notes  early  in  August.  They  were  very  reluctantly 
accepted  as  currency  and  the  banks  refused  to  receive  them 
except  as  special  deposits.  The  new  notes  threatened  to 
bring  infinite  disorder  into  the  currency  system  by  the  ele- 
ment of  inflation  which  they  involved.  The  banks  filed  a 
prompt  protest  against  thus  trifling  with  the  circulating 
medium  while  they  were  straining  their  resources  to  with- 
draw capital  from  active  industry  and  divert  it  to  the  uses 
of  the  government.  The  Secretary  intimated  that  he  would 
suspend  the  issue  of  such  notes  until  other  resources  were 
exhausted,  but  that  he  did  not  regard  it  as  proper  to  pledge 
himself  openly  not  to  exercise  a  power  conferred  by  law. 

This  was  before  the  advances  by  the  banks  had  begun,  and 
upon  this  assurance  they  began  to  pay  coin  into  the  sub- 
treasury  at  the  rate  of  about  $5,000,000  at  intervals  of  six 
days.  The  attempt  to  secure  popular  subscriptions  for  the 
seven-thirty  notes  through  the  agents  of  the  government 
resulted  in  subscriptions  of  only  $24,678,866,  and  the  banks 
themselves  came  forward  and  took  the  notes  and  agreed  to 
negotiate  their  distribution  among  the  people.  So  perfect 
was  the  public  confidence  in  the  associated  banks  and  so 
rapid  the  circulation  of  the  money  that  the  specie  in  the 
banks  had  not  been  materially  reduced  after  the  payment  of 
the  second  instalment.  The  gold  paid  by  the  banks  into 
the  sub-treasury  was  disbursed  by  public  officers  and 
through  the  channels  of  circulation  found  its  way  back  into 


352  HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

the  banks.  There  was  no  apparent  reason  why  advances 
should  not  be  made  in  this  manner  to  meet  all  the  demands 
of  the  war  without  impairing  the  solvency  of  the  Eastern 
banks.  Fears  were  expressed  in  some  quarters  that  the 
coin  would  gradually  be  absorbed  by  the  Western  banks, 
some  of  which  were  on  a  rather  shaky  foundation  and  had 
issued  notes  secured  by  the  bonds  of  the  seceded  States. 
This  evil  had  not  begun  to  operate,  however,  before  Secre- 
tary Chase  again  began  to  put  in  circulation  a  mass  of  de- 
mand notes  issued  directly  by  the  government. 

The  Secretary  did  not  long  respect  his  assurances  to  the 
banks.  The  promise  was  given  in  August  and  heavy  issues 
of  notes  took  place  in  November.  They  were  not  cordially 
received  as  a  means  of  circulation  and  were  largely  presented 
to  the  sub- treasuries  for  redemption  in  coin.  The  Treasury 
had  little  coin  except  that  drawn  from  the  banks,  and  the 
coin  reserves  of  the  latter  now  began  to  decline  without  any 
signs  of  recuperation.  The  specie  in  the  New  York  banks, 
which  was  $49,733,990  on  August  iyth  and  142,318,610  on 
December  yth,  fell  to  $29,357,712  on  December  28th.  A 
conference  was  held  with  Secretary  Chase  and  he  was  as- 
sured that  the  Treasury  notes  could  not  be  received  by  the 
banks  at  par  with  coin  and  that  their  steady  infusion  into 
the  currency  would  send  gold  to  a  premium  as  well  as  create 
an  inflation  of  the  paper  circulation  which  would  drag  down 
the  value  of  bank-notes  in  the  same  manner  as  the  Treasury 
notes.  The  Secretary  stubbornly  refused  to  change  his  pol- 
icy and  the  banks  voted  to  suspend  specie  payments  on  Mon- 
day, Deceniber  31st.1  The  government  necessarily  followed 


1  Prof.  Sumner  seems  to  ignore  the  effect  of  the  government  issues 
of  the  demand  notes  and  declares  that  the  banks  suspended,  "  without 
any  earnest  attempts  to  avoid  it,  and  certainly  without  any  necessity." 
— History  of  American  Currency,  194.  Secretary  Chase,  on  the  con- 
trary, did  not  appear  to  blame  the  banks,  but  declared  that  unex- 
pected military  delays  had  increased  expenditures,  and  diminished 
confidence  in  public  securities,  and  that  "These  conditions  made  a 
suspension  of  specie  payments  inevitable."—  Report  on  the  Finances  > 
1862,  7. 


THE  NATIONAL  BANKING  SYSTEM.  353 

suit,  for  the  independent  Treasury  afforded  no  adequate  fund 
of  coin  for  keeping  afloat  such  a  mass  of  paper  as  Mr.  Chase 
proposed  to  put  into  circulation. 

KThis  suspension,  less  than  six  months  after  the  first 
serious  conflict  at  Bull  Run,  opened  the  way  for  the  long 
experience  of  irredeemable  paper  currency  which  ended  only 
with  the  resumption  of  specie  payments  on  January  i,  1879. 
The  legal  tender  notes,  which  followed  quickly  on  the  heels 
of  the  demand  notes, 'changed  the  standard  of  value  in  the 
United  States/  drove  gold  across  the  ocean  or  into  private 
hoards,  deprived  us  of  foreign  help  and  sympathy /advanced 
priceslrorii  one liundred  to  two  hundred  per  cent.,  and  added 
enormously  to  the  profits  of  speculators  and  to  the  costs  of 
the^war~tb  the  people  of  theZomntry.  The  price  of  gold 
advanced  steadily  from  the  suspension  of  specie  payments 
until  the  summer  of  1864,  when  it  touched  285.  The  whole- 
sale prices  of  nearly  all  articles  climbed  upward  with  the 
gold  premium  and  retail  prices  in  many  cases  advanced  still 
more,  increasing  the  paper  cost  of  every  contract  for  carrying 
on  the  war.  The  government  was  obliged  to  sell  its  secu- 
rities for  depreciated  paper,  and  to  apply  the  proceeds  to 
settlements  in  the  same  inflated  medium.  A  computation  of 
the  proceeds  of  $2,565,233,591  received  from  the  sale  of  pub- 
lic obligations  for  paper  currency  during  forty-five  months 
ending  September  30,  1865,  put  the  gold  value  at  $1,705,- 
347,632,  representing  a  loss  to  the  government  by  its 
depressed  credit  of  $860,000,000,  or  more  than  the  entire 
bonded  debt  left  in  force  at  the  beginning  of  the  fiscal  year 
1889. a 

There  have  always  been  those  who  have  maintained  that 
the  suspension  of  specie  payments  was  a  necessary  condition 

1  In  the  case  of  America  there  was  a  further  evil  ;  being  a  new  coun- 
try, she  ought  in  her  times  of  financial  want  to  borrow  of  old  coun- 
tries ;  but  the  old  countries  were  frightened  by  the  probable  issue  of 
unlimited  inconvertible  paper,  and  they  would  not  lend  a  shilling. — 
Bagehot,  The  English  Constitution,  Ch.  i.,  Works,  IV.,  46. 

2  H.  .C.  Adams,  "  American  War  Financiering,"  Pol.  Sc.  Qrly.,  Sep- 
tember, 1886,  I.,  374. 

23 


354          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

of  war.  The  managers  of  the  associated  banks  of  the  East 
recognized  no  such  necessity  until  Secretary  Chase  began  to 
flood  the  country  with  government  paper  money  for  which 
he  had  no  means  of  redemption.  They  pointed  out  that 
transactions  to  the  amount  of  $20,000,000  were  settled  daily 
in  New  York,  without  coin  or  even  notes  and  that  the  settle- 
ment of  an  additional  one  or  two  million  dollars  daily  for 
the  government  could  be  easily  effected  by  the  same  ma- 
chinery. It  was  only  necessary  that  the  government  should 
have  in  hand  at  any  one  time  enough  currency,  even  if  it 
insisted  upon  coin,  for  the  transactions  of  a  few  days,  while 
the  means  of  giving  mobility  to  the  capital  and  resources  of 
the  country  constantly  existed  in  the  hands  of  th_e,-banks. 
When  the  Secretary  showed  himself  immovable  upon  the 
subject  of  issuing  irredeemable  notes,  the  suggestion  was 
made  to  him  that,  if  this  dangerous  path  must  be  trod, 
it  could  be  done  much  more  safely  through  the  banks 
than  directly  through  the  Treasury.  In  the  forcible 
language  of  Mr.  George  S.  Coe,  it  was  represented  to  Mr. 
Chase :  ' 

That  if  an  irredeemable  paper  currency  was  the  inevitable  resort,  it 
would  be  more  expedient  and  economical  for  the  government  not 
to  become  involved  in  its  dangers,  but  to  impose  the  duty  and  respon- 
sibility of  issuing  the  notes  upon  the  banks,  who  would  naturally  be 
compelled  to  keep  the  day  of  redemption  continually  in  view.  Thus, 
as  a  suspension  of  coin  payment  was  about  to  be  declared,  it  was  prac- 
ticable to  preserve  from  distribution  and  set  aside  the  forty  millions 
of  coin  then  owned  by  the  banks,  together  with  one  hundred  and  fifty 
or  sixty  millions  of  government  bonds,  which  could  be  taken  by 
them  as  a  special  security  for  two  hundred  millions  of  notes,  which 
could  then  be  immediately  issued  by  the  associated  banks  from  their 
own  plates,  and  be  verified  and  made  national  by  the  stamp  and  signa- 
ture of  a  government  officer.  And  that  such  an  issue,  so  supported 
by  coin  and  bonds,  at  once  simple  and  expeditious,  would  serve  the 
temporary  purpose  required,  with  little  if  any  deterioration  below  coin 
value  ;  and  that  it  would  be  then  practicable  for  the  banks  to  con- 
tinue, without  further  agitation,  their  advances.  But  the  Secretary 
declined  to  entertain  this  suggestion  ;  preferring  the  system  of  na- 
tional banks  which  he  had  already  conceived. 

1  "  Financial  History  of  the  War,"  Bankers'  Magazine,  Jan.,  1876. 


THE  NATIONAL  BANKING   SYSTEM.  355 

Secretary  Chase  made  the  fatal  mistake  at  the  outset  of 
relying  upon  loans  to  supply  the  means  of  carrying  on  the 
war  instead  of  appealing  to  the  productive  resources  and 
the  patriotism  of  the  people.  .,  His  recommendation,  at  the 
special  session  of  Congress  in  the  summer  of  1861,  was  to 
raise  $80,000,000  by  taxation  and  $240,000,000  by  loans. 
Of  the  amount  raised  by  taxation  $65,000,000  was  required 
for  the  ordinary  expenses  of  the  peace  establishment, 
$9,000,000  was  to  pay  the  interest  on  the  new  debt,  and 
$5,000,000  was  to  go  to  the  establishment  of  a  sinking  fund 
for  its  final  payment.  It  is  no  afterthought  to  declare  that 
this  policy  of  timidity  was  not  approved  by  the  country.  A 
meeting  of  bank  delegates  was  held  in  Washington  on 
January  n,  1862,  which  recommended  a  tax  bill  to  raise 
$125,000,000  in  addition  to  the  usual  duties  on  imports.  A 
resolution  was  introduced  in  the  House  four  days  later  de- 
claring in  favor  of  an  annual  revenue  of  $150,000,000.  This 
resolution  passed  the  House  with  only  five  dissenting  votes, 
and  its  beneficial  effect  was  shown  by  the  advance  of  six 
per  cent,  bonds  from  90  to  107.  The  New  York  Chamber 
of  Commerce,  on  April  24th,  adopted  a  memorial  to  Con- 
gress declaring  "that  the  masses  of  the  people  are  ready 
and  desirous  to  contribute  their  quota  to  the  ordinary  and 
extraordinary  revenues  of  the  country,"  and  that  the 
public  expenditures  demanded  an  annual  revenue  of  at  least 
$250,000,000. 

It  was  not  until  his  annual  report  of  1863  that  Secretary 
Chase  awakened  to  the  importance  of  taxation  as  a  means 
of  supporting  the  public  credit,  and  suddenly  expressed  his 
desire  for  providing  ' '  for  the  largest  possible  amount  of  ex- 
traordinary expenditures  by  taxation."  The  net  ordinary 
receipts,  exclusive  of  loans,  were  $51,919,261  for  the  fiscal 
year  ending  June  30,  1862;  $112,094,945  for  the  fiscal  year 
1863;  $243,412,971  for  1864;  $322,031,158  for  1865;  and 
$519,949,564  for  1866.  If  these  figures  could  have  been 
moved  backwards  a  single  year,  the  effect  upon  the  credit 
of  the  government,  the  price  of  gold,  and  the  depreciation 
of  the  legal  tender  paper  would  have  been  striking,  even 


356          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

if  the  change  had  not  made  it  unnecessary  to  depart  from  the 
metallic  standard.  It  is  probable  that  of  the  $6,844,571,431 
computed  1  as  the  cost  of  the  war  up  to  the  resumption  of 
specie  payments  in  1879,  $2,000,000,000  could  have  been 
saved  to  the  tax-payers  and  the  public  debt  would  no  longer 
exist.  Outside  and  beyond  these  considerations,  moreover, 
was  the  injury  done  to  depositors  in  savings  banks  and  to 
other  creditors  by  payment  in  a  depreciated  dollar,  and  the 
injury  to  laborers,  whose  wages  were  far  from  keeping  pace 
with  the  advance  in  paper  prices.  2 

It  has  been  necessary  to  refer  to  the  financial  policy  of 
Secretary  Chase  in  order  to  show  the  conditions  out  of  which 
grew  the  national  banking  system.  The  system  was  a  part 
of  the  Secretary's  policy  of  carrying  on  the  war  by  means  of 
loans,  and  was  intended  to  make  a  market  for  American 
securities  and  to  maintain  their  price.  One  of  the  first  effects 
of  the  suspension  of  specie  payments  was  the  increase  of  the 

1  Bolles,  III.,  244.  Mr.  Edward  Atkinson  computes  the  war  ex- 
penditures for  the  seven  years,  1862  to  1868,  exclusive  of  the  peace 
establishment,  at  $4, 150, 000,000,  of  which  "not  less  than  $2, 200, 000,000 
was  paid  for  war  material  and  supplies,  the  prices  of  which  were 
raised  by  the  depreciation  of  bad  money."  The  average  advance  in 
prices  in  the  four  years  of  war  over  the  prices  of  1860  was  87  per 
cent.,  which  increased  the  cost  of  material  of  war  $1,000,000,000. 
Since  that  time  we  have  paid  more  than  five  per  cent,  interest  for 
thirty  years  on  seven-tenths  of  this  sum,  amounting  to  $1,050,000,000. 
—"The  Cost  of  Bad  Money,"  Harper's  Weekly,  Oct.  12, 1895,  XXXIX., 
964. 

-  Wholesale  prices  followed  the  gold  premium  in  a  majority  of 
cases  at  once  or  at  an  interval  of  about  a  month,  but  the  advances  in 
many  retail  lines  were  undoubtedly  much  more  rapid.  Wholesale 
prices,  moreover,  remained  stationary  for  nearly  a  year  after  the  gold 
premium  began  to  fall,  and  then  only  followed  it  downward  at  long 
removes.  See  the  admirable  article  of  Fred  Perry  Powers,  "The 
Greenback  in  WTar,"  Pol.  Sc.  Q'rly,  March,  1887,  II.,  79.  Mr.  Atkin- 
son, in  the  article  quoted  above,  computes  the  transfer  of  profits  from 
wage  earners  to  speculators  or  capitalists,  as  the  result  of  the  legal 
tender  laws,  at  $7,000,000,000  in  the  seven  years  1862-68, — $40  per 
head  annually,  or  $120  for  a  family  of  three,  exclusive  of  enhanced 
payments  directly  for  taxes,  out  of  an  average  income  of  about  $450 
per  family. 


THE  NATIONAL  BANKING  SYSTEM.  357 

circulation  of  the  existing  banks.  The  banks  were  very  pru- 
dently conducted  when  the  war  cloud  first  threatened,  but 
they  were  soon  confronted  by  a  real  demand  for  additional 
circulation  to  take  the  place  of  the  gold  which  disappeared 
with  the  suspension  of  specie  payments.  The  circulation 
of  the  country  outside  the  Treasury,  which  had  been 
$448,405,767  on  July  i,  1861,  had  declined  to  $334,697,744 
on  July  i,  1862.  The  entire  mass  of  specie  in  circulation 
on  the  earlier  date,  which  was  $246,400,000,  had  disap- 
peared, except  about  $25,000,000  on  the  Pacific  Coast. 
United  States  notes  and  demand  notes  had  been  pumped 
into  the  circulation  to  the  amount  of  $125,905,665,  but  they 
did  not  fill  the  void  left  by  the  flight  of  gold  and  silver. 
The  scarcity  of  currency  was  more  than  remedied  by  July 
i,  1863,  when  the  total  had  been  swelled  to  $595,394,038, 
of  which  $312,481,418  was  in  United  States  notes  and 
$238,677,218  in  the  notes  of  the  State  banks.  The  circu- 
lation of  the  latter  had  increased  about  $53,000,000  within 
the  year. 

Secretary  Chase  inquired  in  his  first  annual  report  in  the 
autumn  of  1861  whether,  as  the  bank-note  circulation  con- 
stituted a  loan  without  interest  from  the  people  to  the  banks, 
sound  policy  did  not  require  that  the  advantages  of  this  loan 
be  transferred,  in  part  at  least,  from  the  banks,  representing 
only  the  interest  of  the  stock-holders,  to  the  government, 
representing  the  aggregate  interest  of  the  whole  people. 
The  Secretary  suggested  that  Congress  had  power  to  control 
the  credit  circulation,  and  that  circulating  notes  might  be 
issued  under  national  authority  and  secured  by  the  pledge 
of  United  States  bonds.  He  outlined  the  advantages  of  his 
proposed  measure  thus  : 

Its  principal  features  are,  (ist)  a  circulation  of  notes  bearing  a  com- 
mon impression  and  authenticated  by  a  common  authority  ;  (26)  the 
redemption  of  these  notes  by  the  associations  and  institutions  to 
which  they  may  be  delivered  for  issue  ;  and  (3d)  the  security  of  that 
redemption  by  the  pledge  of  United  State  stocks,  and  an  adequate 
provision  of  specie. 

In  this  plan  the  people,  in  their  ordinary  business,  would  find  the 


358          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

advantages  of  uniformity  in  currency  ;  of  uniformity  in  security  ;  of 
effectual  safeguard,  if  effectual  safeguard  is  possible,  against  deprecia- 
tion ;  and  of  protection  from  losses  in  discounts  and  exchanges ; 
while  in  the  operations  of  the  government  the  people  would  find  the 
further  advantage  of  a  large  demand  for  government  securities,  of  in- 
creased facilities  for  obtaining  the  loans  required  by  the  war,  and  of 
some  alleviation  of  the  burdens  on  industry  through  a  diminution  in 
the  rate  of  interest,  or  a  participation  in  the  profit  of  circulation, 
without  risking  the  perils  of  a  great  money  monopoly.1 

The  Committee  of  Ways  and  Means  of  the  House  of 
Representatives  set  to  work  upon  a  bill  and  made  a  careful 
study  of  the  banking  laws  of  the  various  States.  The  Secre- 
tary's scheme  was  based  upon  the  New  York  free  banking 
law  and  had  been  urged  upon  Mr.  Chase  as  early  as  August, 
1 86 1,  by  Mr.  O.  B.  Potter  of  that  State.  Some  improvements 
on  the  New  York  plan  were  incorporated  in  the  bill  of  the 
committee.  The  provisions  relating  to  the  reserve  fund  were 
drawn  largely  from  the  banking  laws  of  Louisiana,  and  other- 
features  were  adapted  from  the  laws  of  Ohio  and  Illinois, 
It  was  pointed  out  early  in  the  public  discussion  of  the  plan 
that  the  volume  of  circulation  would  depend  upon  the  price 
of  bonds  rather  than  upon  the  needs  of  the  money  market, 
and  opposition  was  pronounced  among  the  New  York  bank- 
ers. Thaddeus  Stevens  reported  against  the  bill,  and  its 
necessity  was  postponed  for  the  time  being  by  the  issue  of 
legal  tender  notes.  Mr.  Chase  returned  to  the  subject  in  his 
annual  report  for  1862,  and  his  language  in  favor  of  basing 
the  monetary  circulation  on  evidences  of  the  public  debt 
sounds  very  like  that  adopted  by  Mirabeau,  in  urging  the 
issue  of  the  assignats  upon  the  French  Assembly.2  The 
Secretary  declared : 

Every  dollar  of  circulation  would  represent  real  capital,  actually 
invested  in  national  stocks,  and  the  total  amount  issued  could  always 
be  easily  and  quickly  ascertained  from  the  books  of  the  Treasury. 
These  circumstances,  if  they  might  not  wholly  remove  the  tempta- 
tion to  excessive  issues,  would  certainly  reduce  it  to  the  lowest  point, 
while  the  form  of  the  notes,  the  uniformity  of  devices,  the  signatures 

1  Report  on  the  Finances,  1861,  19. 

2  Vide  Ch.  xxiii. 


THE  NATIONAL  BANKING  SYSTEM.  359 

of  national  officers,  and  the  imprint  of  the  national  seal  authenticating 
the  declaration  borne  on  each  that  it  is  secured  by  bonds  which  re- 
present the  faith  and  capital  of  the  whole  country,  could  not  fail  to 
make  every  note  as  good  in  any  part  of  the  world  as  the  best  known 
and  best  esteemed  national  securities.1 

The  time  was  more  nearly  ripe  for  such  a  device  than  in 
the  preceding  session,  and  a  bill  was  promptly  introduced 
in  the  House  by  Mr.  Hooper  of  Boston,  who  had  given  much 
attention  to  the  subject  during  the  summer.  Senator  Sher- 
man introduced  a  similar  measure  in  the  upper  branch, 
which  was  passed  and  went  to  the  House  on  February  i2th. 
Much  of  the  argument  in  the  Senate  was  based  upon  the 
fact  that  the  existing  banks  were  increasing  their  circulation, 
without  the  restraining  influence  of  specie  payments,  and 
were  using  the  constantly  swelling  volume  of  government 
paper  money  as  a  means  of  redemption.  The  debate  in  the 
House  was  opened  by  Mr.  Spalding  of  New  York,  who  had 
enjoyed  the  doubtful  honor  of  fathering  the  legal  tender  law. 
The  bill  passed  the  Senate  by  a  vote  of  23  to  21  ;  passed  the 
House  on  February  2oth  by  a  vote  of  78  to  64,  and  received 
the  signature  of  the  President  on  February  25,  1863.  The 
measure  proved  to  be  defective  in  some  of  its  details,  how- 
ever, and  was  superseded  by  the  Act  of  June  3,  1864.  Banks 
to  the  number  of  134  had  been  organized  when  the  Comp- 
troller of  the  Currency  made  his  first  report  in  November, 
1863,  but  no  notes  appeared  until  late  in  December.  The 
system  was  hardly  in  operation,  therefore,  until  the  war  was 
within  a  year  of  its  end,  but  the  fact  that  it  had  been  au- 
thorized undoubtedly  contributed  to  create  a  market  for 
securities  and  to  maintain  their  price. 

The  essential  feature  of  the  new  banking  law,  so  far  as 
concerns  circulation,  was  the  provision  that  circulating  notes 
should  be  issued  by  the  Comptroller  of  the  Currency  upon 
deposits  of  United  States  bonds,  to  the  amount  of  ninety  per 
cent,  of  the  face  value  of  the  bonds.  No  bank  could  be 
organized  with  a  less  capital  than  $100,000,  except  in  places 
with  a  population  not  exceeding  six  thousand,  where  a 

1  Report  on  the  Finances,  1862,  18. 


360         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

bank  might  be  organized,  with  the  approval  of  the  Secre- 
tary of  the  Treasury,  with  a  capital  of  not  less  than  $50,000. 
At  least  fifty  per  cent,  of  the  capital  was  required  to  be  paid 
up  before  beginning  business  and  the  remainder  in  instal- 
ments of  ten  per  cent,  of  the  whole  amount  of  the  capital 
at  the  end  of  each  month.  The  bond  deposit  was  fixed  at 
not  less  than  $30,000  nor  less  than  one- third  the  capital 
stock.  Provision  was  afterwards  made  by  the  Act  of  June 
20,  1874,  for  the  withdrawal  of  circulating  notes  at  the 
option  of  the  banks  and  the  surrender  of  an  equivalent 
amount  of  bonds  by  the  Treasury,  provided  that  the 
amount  of  bonds  on  deposit  should  not  be  reduced  below 
$50,000.  The  limit  was  further  reduced  in  1882,  for  banks 
having  a  capital  of  $150,000  or  less,  to  one-fourth  of  their 
capital  stock,  but  limitations  were  set  upon  both  the  retire- 
ment and  the  issue  of  new  circulation.  The  withdrawal  of 
currency  was  not  permitted  to  proceed  at  the  rate  of  more 
than  $3,000,000  per  month  for  the  entire  country,  and  a 
bank  reducing  circulation  was  not  entitled  to  receive  any 
increase  for  the  period  of  six  months  from  the  time  it  made 
a  deposit  of  lawful  money,  in  lieu  of  the  bonds,  for  the 
redemption  of  outstanding  notes.1 

The  new  banking  currency  was  put  upon  the  same  depre- 
ciated paper  basis  as  the  bonds  and  legal  tender  notes  of  the 
government.  It  could  not  have  circulated  otherwise  in  com- 
mon with  United  States  notes,  for  it  would  have  been  at  a 
premium,  like  gold,  or  would  have  been  presented  to  the 
banks  for  redemption  in  gold  for  hoarding.  The  law  made 
the  notes  redeemable  in  "lawful  money."  Redemption  of 
this  sort  was  simply  the  exchange  of  a  note  secured  by  one 
government  obligation  for  another,  and  was  of  so  little  value 
that  the  banks  were  seldom  troubled  by  the  presentation  of 
their  notes,  although  they  were  required  to  carry  large  quan- 

1  This  limitation  proved  troublesome  to  a  few  banks  which  desired 
to  take  out  circulation  quickly  during  the  panic  of  1893,  but  had 
within  six  mouths  deposited  lawful  money  with  a  view  to  retiring  cir- 
culation. Comptroller  Eckels  recommended  its  repeal  in  his  annual 
reports  for  1894  and  1895. 


THE  NATIONAL  BANKING  SYSTEM.  361 

titles  of  legal  tenders  as  a  part  of  their  lawful  reserve. '  The 
banks  in  Albany,  Baltimore,  Boston,  Cincinnati,  Chicago, 
Cleveland,  Detroit,  Louisville,  Milwaukee,  New  Orleans, 
New  York,  Philadelphia,  Pittsburg,  St.  Louis,  San  Fran- 
cisco, and  Washington  were  required  to  keep  a  reserve  in 
lawful  money  equal  to  twenty-five  per  cent,  of  their  aggregate 
notes  in  circulation  and  deposits.  Banks  outside  of  these 
' '  reserve  cities  ' '  were  required  to  keep  a  reserve  of  at  least 
fifteen  per  cent.,  but  three-fifths  of  the  reserve  in  these  cases 
might  be  deposited  with  banks  in  the  "reserve  cities." 

Hugh  McCulloch  was  the  first  Comptroller  of  the  Cur- 
rency appointed  under  the  new  law,  and  it  is  to  his  ability 
and  good  judgment  that  much  of  the  success  of  the  new 
banking  system  was  due.  He  had  been  president  of  the 
admirably  managed  Bank  of  the  State  of  Indiana,  and  went 
to  Washington  in  1862  to  oppose  the  national  banking  bill. 
His  opinions  underwent  a  change  after  the  bill  was  amended 
in  the  following  year  and  became  a  law,  but  it  was  with 
some  surprise  that  he  received  the  invitation  to  become  the 
head  of  the  new  system.  He  stipulated  for  absolute  control 
over  the  choice  of  his  employees  and  for  permission  to  re- 
sign the  place  as  soon  as  the  system  was  well  organized. 
The  First  National  Bank  of  Philadelphia  was  the  first  au- 
thorized to  begin  business,  on  June  20,  1863.  Several  other 
certificates  were  issued  on  the  same  day,  but  the  Western 
banks  were  generally  more  prompt  to  come  into  the  national 
system  than  those  of  the  East.  Mr.  McCulloch  discusses 
some  of  the  objections  to  the  new  system  and  the  manner  in 
which  he  met  them,  in  the  following  passage  of  his  me- 
moirs : 


1  It  was  the  distinct  proposal  of  Secretary  Chase  that  the  notes 
should  be  payable,  "after  resumption,  in  specie,  by  the  association 
which  issues  them,  on  demand  ;  and  if  not  so  paid  will  be  redeema- 
ble at  the  Treasury  of  the  United  States  from  the  proceeds  of  the 
bonds  pledged  in  security." — Report  on  the  Finances,  1862,  17.  But 
this  safeguard  was  not  adopted,  and  the  banks  continued,  long  after 
resumption  by  the  Treasury,  to  redeem  their  notes  only  in  paper 
money. 


362          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

There  were  four  causes  for  the  unwillingness  of  the  State  banks  to 
become  national  banks. 

First :  The  apprehension  that  the  national  system  might  prove  to 
be  a  repetition  of  the  free-bank  system  of  the  West,  which  had  been  a 
disreputable  failure. 

Second  :  The  opinion  that  in  becoming  national  banks,  and  issu- 
ing notes  secured  by  Government  bonds,  their  interests  would  be  so 
identified  with  the  interests  of  the  Government,  their  credit  so  de- 
pendent upon,  so  interwoven  with,  the  public  credit,  that  they  would 
be  ruined  if  the  integrity  of  the  Union  should  not  be  preserved. 

Third  :  the  danger  of  hostile  legislation  by  Congress,  or  the  annoy- 
ances to  which  they  might  be  exposed  by  Congressional  interference 
with  their  business  for  partisan  purposes. 

Fourth  :  The  requirement,  that  in  order  to  become  national  banks, 
they  must  relinquish  the  names  to  which  they  had  become  attached, 
and  be  known  by  numerals. 

I  had  no  great  difficulty  in  satisfying  the  bankers  with  whom  I  had 
personal  interviews  or  correspondence  that  three  of  these  objections 
were  unsubstantial.  In  answer  to  the  first,  I  pointed  out  the  impor- 
tant particulars  in  which  the  national  system  differed  from  the  free- 
bank  system  of  the  West,  in  the  requirement  that  the  capitals  of  the 
national  banks  should  be  real,  and  fully  paid  up ;  that  their  circula- 
tion was  to  be  secured  by  United  States  bonds,  with  ten  per  cent, 
margin  ;  that  in  case  of  the  failure  of  a  bank,  its  notes  would  be  at 
once  redeemable  at  the  United  States  Treasury;  that  all  the  banks 
would  be  subjected  to  frequent  examinations  by  men  appointed  by 
the  Treasury  Department.  In  answer  to  the  second,  I  took  the 
ground  that  the  interests  of  the  State  banks  were  already  so  involved 
with  those  of  the  Government,  that  the  fate  of  the  latter  would  be  the 
fate  of  the  former  also  ;  that  whether  they  remained  State  banks  or 
became  national,  they  would  stand  or  fall  with  the  Government.  In 
answer  to  the  third,  I  expressed  the  opinion  that  there  was  as  little 
to  fear  from  Congressional  as  from  State  legislation  ;  that  if  there 
was  trouble  to  be  apprehended  in  either  direction,  it  would  be  in  the 
control  which  the  banks  might  have  over  Congress,  rather  than  in 
annoying  interference  by  Congress  with  their  legitimate  business. 
To  the  fourth  I  could  make  no  reply.  It  seemed  to  me  to  be  unrea- 
sonable that  the  State  banks  should  be  required,  in  order  to  be  con- 
verted into  national  banks,  to  surrender  the  names  that  had  been 
made  honorable  by  the  manner  in  which  their  business  had  been 
conducted,  and  accept  for  a  name,  a  number.1 


1  Men  and  Measures  of  Half  a  Century ',  168,  169. 


THE  NATIONAL  BANKING  SYSTEM.  363 

The  last  point  was  finally  conceded  by  the  Secretary,  and 
banks  were  allowed  to  retain  their  old  names  with  the  pre- 
fix "national."  When  this  was  yielded,  says  Mr.  McCul- 
loch,  "they  came  into  the  national  system  with  a  rush, — 
Boston,  as  is  her  wont  in  all  enterprises,  taking  the  lead." 
An  Act  was  passed  in  1873  forbidding  the  use  of  the  word 
"  national  "  in  the  titles  of  banking  institutions  not  organized 
and  transacting  business  under  the  National  Currency  Act. 

The  destruction  of  the  State  banks  as  banks  of  issue  by 
taxation  was  not  a  component  part  of  the  national  banking 
system  at  its  origin.  Secretary  Chase,  in  his  first  annual 
report,  suggested  the  possibility  of  taxation,  in  order  to 
transfer  to  the  government  some  of  the  profits  of  circulation, 
and  he  remarked,  in  his  second  annual  report  for  1862,  that 
he  had  ' '  heretofore  advised  the  imposing  of  a  moderate  tax 
on  corporate  circulation,  and  now  renews  the  recommenda- 
tion as  the  best  means  of  reduction  and  gradual  substitu- 
tion." The  first  banking  act  provided  that  any  State  bank 
holding  United  States  bonds  to  the  amount  of  fifty  per  cent, 
of  its  capital  stock  might  deliver  them  to  the  United  States 
Treasurer  and  receive  circulating  notes  equal  to  eighty  per 
cent,  of  the  face  value  of  the  bonds  transferred,  and  that 
upon  the  failure  of  such  a  bank  the  bonds  should  be  declared 
forfeited  to  the  United  States  and  the  circulating  notes  should 
be  redeemed  and  paid  at  the  United  States  Treasury.  These 
provisions  for  State  banks  were  omitted  from  the  Act  of 
June  3,  1864,  and  Comptroller  McCulloch,  in  his  annual  re- 
port for  1864,  suggested  the  query  whether  "the  time  has 
not  arrived  when  all  these  institutions  should  be  compelled 
to  retire  their  circulation  ?  ' '  He  stated  that  he  had  not  felt 
like  recommending  such  action  "  as  long  as  there  was  any 
uncertainty  in  regard  to  the  success  of  the  national  banking 
system,"  and  he  limited  his  recommendations  to  taxation 
"which  should  be  sufficient  to  effect  the  object  without 
being  oppressive."  *  The  result  was  a  provision  in  the 
Revenue  Act  of  March  3,  1865,  laying  a  tax  of  ten  per  cent. 


Report  on  the  Finances,  1864,  54. 


364         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

per  annum  upon  the  circulation  of  State  banks  paid  out  by 
them  after  July  i,  1866.  This  provision,  therefore,  did  not 
take  effect  until  a  year  after  the  practical  close  of  the  war, 
and  was  intended  to  drive  the  State  banks  out  of  competi- 
tion with  the  national  system  and  to  enlarge  the  market  for 
United  States  bonds. 

There  was  still  in  circulation  on  July  i,  1864,  $179,157,717 
in  State  bank-notes  and  only  $31,235,270  in  national  bank- 
notes. The  State  bank-notes  amounted  to  $142,919,638  on 
July  i,  1865,  three  months  after  Appomattox,  but  had  been 
slightly  surpassed  by  the  national  bank-notes,  which  now 
amounted  to  $146,137,860.  The  arrival  of  the  date  for  the 
enforcement  of  the  ten  per  cent,  tax,  a  year  later,  found 
$19,996,163  in  circulation  in  State  bank-notes  and  $276,012,- 
713  in  national  bank-notes.  The  State  bank-notes  dwindled 
to  $4, 484, 1 12  a  year  later,  and  their  last  appearance  in  the 
Treasury  reports  was  on  July  i,  1876,  when  the  amount  was 
stated  at  $1,047,335.  The  Act  levying  the  ten  per  cent,  tax 
was  several  times  revised  and  was  extended  in  the  Act  of 
March  26,  1867,  to  every  national  or  State  banker  paying 
out  the  notes  of  any  town,  city,  or  municipal  corporation 
after  May  i,  1867.'  The  law  was  finally  re-enacted  by  sec- 
tions 19,  20,  and  21  of  the  Act  of  February  8,  1875,  so  as  to 
apply  the  ten  per  cent,  tax  to  persons,  firms,  or  corporations 


'The  Attorney  General,  on  November  21,  1893,  in  an  opinion  re- 
garding a  clearing  house  certificate  of  deposit,  declared  that  the  paper 
•was  "not  within  the  meaning  of  the  statute,"  and  cited  the  rule  of 
law  that  "  If  there  is  any  doubt  as  to  the  meaning  of  the  statute  impos- 
ing this  tax  the  doubt  must  be  resolved  in  favor  of  exemption." — 
Official  Opinions  of  the  Attorneys  General,  XX.,  682.  The  Solicitor 
of  the  Treasury  gave  an  opinion  on  September  28,  1894,  in  regard  to 
a  proposed  issue  of  county  bonds  of  small  denominations  for  use  as  a 
local  currency,  "that  no  statute  of  the  United  States  prohibits  the 
issue  of  county  bonds  in  any  denomination."  He  also  observed  "that 
the  word  '  county '  is  not  enumerated  among  the  corporations,  bank- 
ing associations,  etc.,  mentioned  in  the  statute ;  nor  can  the  word 
'notes'  be  held  to  include  county  bonds."  Both  these  opinions  re- 
ferred to  the  similar  language  of  the  Act  of  February  8,  1875,  then  in 
force. 


THE  NATIONAL  BANKING  SYSTEM.  365 

paying  out  their  own  notes  or  those  of  any  person,  firm,  or 
corporation  other  than  a  national  banking  association.1 

Several  of  the  States  passed  laws  to  aid  the  State  banks 
in  organizing  under  the  national  system  and  many  of  them 
made  the  change  during  the  years  1864  and  1865.  The 
number  of  banks  organized  for  the  year  ending  October  31, 
1864,  was  453  with  an  aggregate  capital  of  $79,366,950,  and 
the  number  organized  for  the  year  ending  October  31,  1865, 
was  1014  with  an  aggregate  capital  of  $242,542,982.  This 
was  the  year  during  which  the  impending  levy  of  the  ten  per 
cent,  tax  drove  nearly  all  banks  desiring  to  continue  their 
circulation  into  the  new  system.  The  number  of  organiza- 
tions for  the  year  ending  October  31,  1866,  was  only  62  and 
for  the  next  year  only  10.  The  reorganization  was  accom- 
plished with  little  friction  and  without  arresting  the  ordinary 
business  of  the  banks.  The  stocks  of  many  of  them  increased 
in  value  and  Comptroller  McCulloch  declared  in  1864  that 
he  knew  "of  no  instance  in  which  their  real  market  value 
had  been  injuriously  affected."  Congress  gave  a  preference 
by  an  Act  of  March  3,  1865,  to  State  banks  not  having  over 
$75,000  of  capital  in  entering  the  national  system,  but,  in 
view  of  the  ten  per  cent,  tax  on  their  notes,  it  was  a  rather 
humorous  observation  which  was  made  by  Comptroller 
Clarke,  who  succeeded  Mr.  McCulloch,  that  "  nearly  all  of 
the  State  banks  voluntarily  changed." 

The  original  limit  imposed  on  the  national  bank  circula- 
tion was  $300,000,000,  and  it  was  provided  that  $150,000,000 
should  be  apportioned  to  banks  in  the  States  and  Territories 
according  to  population  and  the  remainder  at  the  discretion 
of  the  Secretary  of  the  Treasury,  with  due  regard  to  existing 
banking  capital,  resources,  and  business.  Some  conflict 


1  These  sections  refer  in  every  case  to  "notes"  or  "circulating 
notes,"  and  Mr.  Edward  Atkinson  of  Boston  has  expressed  the  con- 
viction that  they  do  not  impose  any  tax  upon  certificates  of  deposit 
given  by  national,  State,  or  private  bankers  to  their  depositors,  even 
though  such  certificates  might  be  printed  for  even  amounts  and  used 
for  general  circulation.— Journal  of  Commerce  and  Commercial  Bul- 
letin, Monday,  July  29,  1895. 


366          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

resulted  between  this  provision  and  that  giving  preference  to 
the  State  banks,  and  the  Comptroller  permitted  the  organi- 
zation of  the  latter  without  limit.  No  stable  State  banks 
existed  in  some  of  the  Western  States,  so  that  their  share 
of  banking  capital  was  reduced  to  a  minimum,  and  the  diffi- 
culty was  increased  with  the  restoration  of  the  Southern 
States  to  the  Union.  The  Act  of  July  12,  1870,  therefore, 
authorized  an  increase  of  $54,000,000  in  the  bank-note  circu- 
lation, to  be  apportioned  to  banks  "  in  those  States  and 
Territories  having  less  than  their  proportion,"  and  anew 
apportionment  was  directed  to  be  made  as  soon  as  practicable, 
based  upon  the  census  of  1870.  Provision  was  also  made 
for  withdrawing  $25,000,000  of  circulation  from  banks  in 
States  having  an  excess. 

The  withdrawal  of  circulation  was  found  to  be  difficult, 
because  the  notes  did  not  reach  the  banks  or  the  Treasury 
for  redemption.  It  was  only  for  the  interest  of  the  stock- 
holders of  new  banks  to  compel  redemption,  by  paying  a 
premium  to  brokers  to  sort  out  notes  subject  to  withdrawal 
and  send  them  to  the  Treasury.  The  inflation  bill  vetoed 
by  President  Grant  in  1874  contained  a  provision  for  adding 
$46,000,000  to  the  bank-note  circulation.  Congress  took  a 
new  tack  after  the  veto,  and  provided  for  the  withdrawal  of 
$55,000,000  of  circulation  from  States  having  an  excess  and 
its  issue  in  States  having  a  deficiency.  This  Act, — that  of 
June  20,  1874, — was  the  first  to  provide  for  the  voluntary 
retirement  of  circulation  by  the  deposit  of  lawful  money 
with  the  United  States  Treasurer  and  the  return  of  the 
bonds  to  the  bank.  The  panic  of  1873  and  the  redundancy 
of  currency  which  followed,  led  to  the  voluntary  retirement 
of  circulation,  so  that  no  requisitions  upon  the  Eastern 
banks  were  required  to  execute  the  Act  of  1874.  The  Act 
for  the  resumption  of  specie  payments,  approved  January 
14,  1875,  wiped  out  any  specific  limitation  upon  the  amount 
of  national  bank-notes  and  declared  that  "each  existing 
banking  association  may  increase  its  circulating  notes  in 
accordance  with  existing  law  without  respect  to  said  aggre- 
gate limit ;  and  the  provisions  of  law  for  the  withdrawal  and 


THE  NATIONAL  BANKING  SYSTEM.  367 

re-distribution  of  national  bank  currency  among  the  several 
States  and  Territories  are  hereby  repealed." 

The  national  banks  bore  an  honorable  part  in  bringing 
about  the  resumption  of  specie  payments.  A  few  bankers 
who  had  extended  their  speculations  beyond  legitimate 
limits  undoubtedly  desired  to  see  the  regime  of  irredeemable 
paper  perpetuated,  but  the  majority  were  earnestly  in  favor 
of  return  to  a  specie  basis.  Secretary  McCulloch  strongly 
urged  resumption  in  his  first  annual  report  in  1865  and  was 
authorized  by  the  Act  of  April  12,  1866,  to  receive  legal 
tender  notes  for  bonds  and  cancel  the  notes  to  an  amount 
not  exceeding  $10,000,000  in  the  first  six  months  and 
$4,000,000  in  any  one  month  thereafter.  The  maximum  price 
of  gold,  which  had  been  233.75  in  1865,  was  167.75  *n  l866 
and  145.625  in  1867.  Secretary  McCulloch  reduced  the  out- 
standing legal  tenders  from  $422,424,007  on  March  31,1866, 
to  $356,000,000  in  February,  1868.  The  fear  of  contraction, 
stimulated  by  the  reaction  from  the  fever  of  the  war  specu- 
lation, seized  upon  Congress  and  the  further  retirement  of 
legal  tender  notes  was  forbidden  by  the  Act  of  February 
3,  1868. 

The  Resumption  Act  was  the  outcome  of  a  caucus  com- 
mittee appointed  by  the  Republicans  in  December,  1874,  to 
frame  a  measure  upon  which  the  party  could  unite.  The 
previous  session  had  witnessed  the  passage  of  the  inflation 
bill,  increasing  the  limit  of  legal  tender  issues  to  $400,000,- 
ooo  and  authorizing  an  addition  of  $46,000,000  to  the  bank- 
note circulation,  to  be  distributed  to  banks  in  the  West  and 
South.  The  bill  was  vetoed  by  President  Grant  and  the 
inflation  fever  was  checked.  The  Resumption  Act  was 
hurried  through  Congress  within  six  weeks  after  the  begin- 
ning of  the  session  and  was  intentionally  left  in  clumsy  and 
ambiguous  shape  in  order  to  hold  votes.  Senator  Schurz  of 
Missouri  repeatedly  inquired  of  Senator  Sherman,  who  had 
the  bill  in  charge,  whether  the  legal  tender  notes  redeemed 
in  coin,  as  proposed  by  the  bill,  were  to  be  retired  and  can- 
celled. Mr.  Sherman  refused  to  give  a  definite  reply  and 
Mr.  Schurz  voted  with  the  Democratic  Senators  against 


368          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

the  bill.1  Its  redeeming  feature  was  the  provision  for  the 
resumption  of  specie  payments  at  the  New  York  sub- 
Treasury  on  January  i,  1879,  and  the  issue  of  bonds  to 
obtain  the  necessary  coin. 

The  success  of  specie  resumption  depended  largely  upon 
the  action  of  the  banks.  They  held  more  than  $125,000,000 
in  legal  tender  notes,  of  which  nearly  one-third  was  in  New 
York  City.  A  run  upon  the  sub-Treasury  for  gold  by  means 
of  these  notes  would  have  quickly  compelled  a  new  suspen- 
sion of  specie  payments.  The  subject  of  resumption  was 
discussed  by  the  banks  and  a  committee  was  appointed  to 
confer  with  Secretary  Sherman  and  agree  upon  a  common 
course  of  action  to  sustain  the  public  credit.  The  Assistant 
Treasurer  at  New  York  was  invited  to  become  a  member  of 
the  Clearing  House  and  balances  between  the  banks  and  the 
Treasury  were  proposed  to  be  settled  through  the  Clearing 
House.  The  banks  voluntarily  decided  to  decline  receiving 
gold  as  a  special  deposit,  to  abolish  special  exchanges  of 
gold  checks  at  the  Clearing  House,  and  to  receive  and  pay 
balances  without  discrimination  between  gold  and  legal 
tender  notes.  This  action  dissipated  all  serious  fear  of  the 
success  of  resumption,  and  on  December  17,  1878,  gold  sold 
at  par  in  the  gold  room  of  the  New  York  Stock  Exchange. 
The  banks,  in  the  language  of  Mr.  Bolles,  at  the  beginning 
of  the  war  "parted  with  their  gold  to  aid  the  government, 
and  now,  when  resumption  was  accomplished,  they  were 
content  to  take  whatever  it  desired  to  give."  z 

It  was  the  policy  of  the  Resumption  Act  to  reduce  the 
volume  of  United  States  legal  tender  paper  at  the  rate  of  80 
per  cent,  of  the  new  national  bank-notes  issued  and  to  con- 
tinue redemption  until  the  legal  tenders  should  be  reduced 
to  $300,000,000.  The  expectation  that  the  bank  currency 
would  rapidly  expand  to  fill  the  void  left  by  the  retirement 
of  the  legal  tenders  was  not  fulfilled.  The  circulation 

1  Mr.  Sherman,  when  Secretary  of  the  Treasury,  resolved  this  doubt 
in  his  annual  report  for  1877,  in  favor  of  re-issuing  the  notes,  but  his 
opinion  was  soon  deprived  of  practical  importance  by  the  resolution 
of  May  31,  1878,  forbidding  the  further  retirement  of  legal  tender  notes. 

4  Financial  History  of  the  United  States,  III.,  301. 


THE  NATIONAL   BANKING   SYSTEM.  369 

secured  by  bonds  reached  a  maximum  of  $350,692,966  on 
December  i,  1873,  and  fell  rapidly  from  that  time  until 
November  i,  1876,  when  the  amount  was  $301,658,372.' 
The  price  of  bonds  as  well  as  the  redundancy  of  currency 
was  beginning  to  exercise  the  restraining  influence  on  bank- 
note circulation  which  in  subsequent  years  forced  it  within 
a  narrow  compass.  The  contraction  of  the  bank-note  cir- 
culation and  the  retirement  of  government  currency  alarmed 
the  advocates  of  an  ample  money  supply  and  led  to  the 
resolution  of  May  31,  1878,  providing  for  a  second  time  that  it 
should  not  be  lawful  "for  the  Secretary  of  the  Treasury  or  other 
officers  under  him  to  cancel  or  retire  any  more  of  the  United 
States  legal  tender  notes."  The  volume  of  legal  tenders  in 
circulation  on  the  day  the  Act  became  law  was  $346,681,016, 
and  has  remained  rigid  at  this  amount  since  that  date, 
except  for  the  addition  of  the  Treasury  notes  issued  under 
the  Sherman  law  and  the  temporary  retention  of  notes  in  the 
Treasury. 

There  was  a  slight  tendency  to  increase  bank-note  circula- 
tion for  a  time  after  the  revival  of  business  in  i88o,2  but  the 
increase  was  sharply  arrested  in  the  winter  of  1881  by  the 
passage  of  a  bill  requiring  the  banks  to  deposit  a  new  issue 

1  The  aggregate  circulation  on  the  earlier  of  these  dates  was  $352,- 
621,762  and  on  the  later  date  1323,241,308.     The  difference  between 
"  secured  "  and  actual  circulation  is  made  up  by  deposits  of  lawful 
money  with  the  United  States  Treasurer  for  the  redemption  and  can- 
cellation of  notes  still  outstanding,  for  which  the  bonded  security  has 
been  withdrawn  by  the  banks.     This  "lawful  money  "  fund  is  reduced 
as  fast  as  the  notes  are  redeemed  from  it  and  retired,  but  the  with- 
drawal of  bonds  was  so  rapid  that  the  amount  ran  as  high  as  $  107,588, 
447  on  July  i,  1887.     The  fund  stood  at  $54,207,975  when  the  Act  of 
July  14,  1890,  (Section  6)  directed  that  it  "  be  covered  into  the  Treasury 
as  a  miscellaneous  receipt"  and  that  redemptions  be  made  thereafter 
from  the  general  cash.     The  notes  outstanding  redeemable  in  lawful 
money  on  December  31,  1895,  were  $23,011,661. 

2  One  of  the  causes  of  the  decline  in  secured  circulation,  as  the  date 
approached  for  the  resumption  of  specie  payments,  was  the  fact  that 
the  price  of  the  bonds  was  falling  in  currency  in  order  to  accommo- 
date itself  to  the  gold  basis.     This  made  it  profitable  to  sell  before 
the  premium  disappeared,  as  the  currency  obtained  for  the  bonds  was 
appreciating  in  value  as  it  approached  parity  with  gold. 


370 


HISTORY  OF  MODERN  BANKS  OF  ISSUE. 


of  three  per  cent,  refunding  bonds  as  security  for  circulating 
notes.  This  limitation  on  the  class  of  bonds  was  accom- 
panied by  a  drastic  provision  repealing  the  authority  to 
reduce  circulation  and  withdraw  bonds.  The  banks  gen- 
erally preferred  to  retain  the  existing  bonds,  paying  higher 
rates  of  interest,  even  with  the  loss  of  circulation,  than  to 
submit  to  such  a  measure,  and  141  banks  hastened  to  deposit 
$18,764,434  in  lawful  money  for  the  retirement  of  their  notes 
and  the  withdrawal  of  their  bonds  in  anticipation  of  the 
enactment  of  the  bill.  The  measure  was  vetoed  by  President 
Hayes,  but  the  result  upon  the  secured  circulation  was  to 
reduce  it  from  $322,654,721  on  February  i,  1881,  to  $305,- 
587,202  on  March  i,  1881.  Many  of  the  bonds  were  de- 
posited again  after  the  adjournment  of  Congress  and  the 
circulation  increased  to  $332,398,922  on  January  i,  1882. 
A  gradual  decline,  whose  results  may  be  observed* in  the 
following  table,  marked  the  history  of  the  secured  circulation 
from  1882  to  1892  : 


JANUARY  1ST. 

AUTHORIZED  CAPITAL 
STOCK. 

CIRCULATION  SECURED 
BY  BONDS. 

TOTAL  NOTES  OUT- 
STANDING. 

1873 

$487,781,551 

$344,582,812 

$347,066,893 

1874 

499,003,401 

348,624,953 

350,848,236 

I8?5 

503,347,901 

342,333,837 

354,128,250 

1876 

511,155,865 

324,484.539 

346,479,756 

1877 

501,392,171 

3O2.O2O,242 

321,595,606 

1878 

485,557,771 

309,890,415 

321,672,505 

1879 

471,609,396 

3I3,2l8,lS9 

323,791,674 

1880 

461,557,515 

328,773,639 

342,387,336 

1881 

467,039,084 

322,832,101 

344,355,203 

1882 

470,OJ8,I35 

332,398,922 

362,421,988 

1883 

492,076,635 

322,386,120 

362,651,169 

1884 

518,031,135 

310,953,321 

350,482,828 

1885 

529,910,165 

285,496,055 

329,158,623 

1886 

534.378,265 

274,466,748 

317,443.454 

1887 

555,865,165 

205,316,106 

296,771,981 

1888 

584,726,915 

165,205,724 

268,398,878 

1889 

598,239,065 

146,372,588 

233,66O,O27 

1890 

623,7QI,365 

127,742,440 

197,230,405 

1891 

665,267,865 

125,660,361 

177,287,846 

1892 

685,762,265 

I4O,O84,2O3 

173,078,585 

1893 

695,148,665 

150,526,651 

174,404,424 

1894 

693,353,165 

185,194,522 

208,538,844 

1895 

670,906,365 

176,667,466 

206,513,653 

1896 

664,076,915 

I9O,6l6,l6O 

213,627,821 

THE  NATIONAL   BANKING   SYSTEM.  3/1 

It  is  obvious  that  a  currency  system  whose  permanent 
circulation  was  reduced  to  $125,000,000  for  a  population  of 
63,000,000,  had  ceased  to  serve  one  of  the  chief  purposes  for 
which  it  was  created.  The  causes  are  to  be  found  in  the 
rapid  payment  of  the  national  debt,  which  reduced  the  pos- 
sible basis  for  circulation  ;  the  high  price  of  bonds,  which 
reduced  the  profit  on  circulation  ;  and  the  steady  stream 
of  silver  money  which  was  pumped  into  the  monetary  sys- 
tem under  the  laws  of  1878  and  1890,  crowding  out  other 
forms  of  currency.  Hostility  to  the  national  banks,  though 
frequently  expressed  in  the  southern  and  western  parts  of 
the  country,  was  a  result  rather  than  a  cause  of  their  shrink- 
ing circulation.  There  was  filibustering  in  Congress  against 
the  bill  to  extend  their  charters,  but  the  fact  that  their  dis- 
counts and  deposits  remained  unshaken  is  the  best  proof 
that  the  business  community  never  seriously  doubted  that 
the  system  would  survive.  The  original  law  gave  the  banks 
corporate  powers  for  twenty  years  and  the  new  bill  proposed 
their  continuance  for  another  twenty  years.  Mr.  Crapo,  of 
Massachusetts,  who  was  in  charge  of  the  bill  in  the  House, 
failed  twice  to  secure  consideration,  because  under  the  rules 
it  required  a  two-thirds  vote,  but  he  obtained  the  necessary 
votes  on  May  i,  1882,  and  the  bill  passed  the  House  on 
May  iyth,  by  a  vote  of  125  to  67.  It  passed  the  Senate  with 
amendments  on  June  22d  and  became  law  on  July  i2th. 

The  essential  cause  of  diminishing  circulation  was  finan- 
cial rather  than  political  and  was  chiefly  found  in  the  grow- 
ing wealth  and  credit  of  the  country.  The  bonded  debt  of 
the  United  States  shrivelled  from  $1,639,567,750  on  June  30, 
1881,  to  $610,529, 120  on  June  30,  1891,  and  the  result  was 
the  wiping  out  of  two  large  bond  issues  and  almost  the 
extinction  of  a  third.  The  national  banks,  which  had 
$360,488,400  in  bonds  on  deposit  to  secure  circulation  at  the 
earlier  date,  had  only  $142,508,900  on  deposit  at  the  later 
date,  although  the  proportion  to  the  whole  remained  almost 
exactly  the  same.  The  price  of  bonds,  as  secure  gold  invest- 
ments, rose  to  such  a  point  that  their  investment  value  fell 
far  below  three  per  cent.,  and  their  price  was  enhanced  by 


3/2          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

the  large  purchases  by  the  government  in  advance  of  matu- 
rity made  necessary  by  the  enormous  surplus  accumulating 
in  the  Treasury.  These  purchases  of  bonds  at  a  premium, 
exclusive  of  redemptions  at  par  at  maturity,  were  $51,464,300 
for  the  fiscal  year  1888  ;  $120,674,450  for  the  fiscal  year  1889  ; 
$104,546,750  for  the  fiscal  year  1890;  and  $45,175,200  for 
the  fiscal  year  1891 ,  after  which  purchases  ceased.  The  high- 
est average  price  paid  by  the  government  for  four  per  cent. 
bonds  was  128.66  in  1889,  when  $38,106,400  were  purchased. 
The  lowest  average  price  was  124.23  in  1891,  two  years 
nearer  maturity,  when  $42,641,250  were  purchased.  1  These 
bonds  remained,  after  the  maturity  of  the  four  and  a  half 
percent,  loan  in  1891,  the  chief  source  of  security  for  national 
bank-note  circulation,  and  their  price,  including  the  premium, 
could  be  more  profitably  loaned  in  many  cases  in  the  open 
market  than  by  obtaining  ninety  per  cent,  of  the  par  value 
of  the  bonds  in  circulating  notes. 2  The  clamor  of  dema- 
gogues against  the  "double  interest"  derived  from  the 
circulating  notes  and  the  interest  on  the  bonds  was  less 
eloquent  of  the  facts  than  the  steady  withdrawal  of  bonds 
because  circulation  had  ceased  to  be  profitable.  The  increase 
in  circulation  since  1891  has  been  due  to  the  fall  in  the 
premium  on  the  bonds  as  they  have  approached  maturity 
and  to  special  causes,  referred  to  elsewhere,  connected  with 
the  crisis  of  1893  an(^  the  bond  issues  of  1894,  1895  an(^ 
1896. 

The  effect  of  the  increase  of  the  silver  circulation  under 
the  Bland- Allison  Act  of  1878  and  the  Sherman  compromise 
Act  of  1890,  in  driving  bank-notes  out  of  existence  can  only 
be  roughly  estimated.  It  was  probably  much  less  potent 

1  These  figures  are  taken  from  a  communication  of  Secretary  Car- 
lisle to  the  Senate,  Sept.    26,  1893,  in  response  to  a  resolution  of  that 
body. — Sen.  Ex.  Doc.  18,  Fifty-third  Congress,  1st  Sess. 

2  The  recommendation  was  several  times  made  by  the  Comptroller 
of  the  Currency,  and  embodied  in  bills  introduced  in  Congress,  after 
the  resumption  of  specie  payments,  that  the  banks  be  authorized  to 
issue  circulation  to  the  face  value  of  the  bonds  deposited  as  security, 
instead  of  ninety  per  cent,  of  that  value  ;  but  no  such  measure  evei 
became  law. 


THE   NATIONAL  BANKING  SYSTEM.  373 

than  the  rise  in  the  price  of  bonds,  and  had  more  effect  in 
expelling  gold  than  bank-notes  from  the  circulation.  The 
Bland  Act,  which  was  passed  over  the  veto  of  President 
Hayes  on  February  28,  1878,  authorized  the  Secretary  of 
the  Treasury  to  purchase  not  less  than  $2,000,000  nor  more 
than  $4,000,000  worth  of  silver  monthly  and  coin  it  into 
standard  silver  dollars  of  412)^  grains  each,  nine-tenths 
fine.  Every  Secretary  of  the  Treasury  confined  his  purchases 
closely  to  the  minimum  and  the  aggregate  purchases,  until 
the  act  was  superseded  by  the  Act  of  1890,  were  291,272,019 
fine  ounces,  at  a  cost  of  $308,279,261,  which  was  coined  into 
378, 166,793  standard  silver  dollars.  The  Act  of  1890,  which 
was  approved  by  President  Harrison  on  July  i4th,  took  effect 
thirty  days  after  its  passage  and  provided  for  the  monthly 
purchase  by  the  Secretary  of  the  Treasury  of  four  and  a 
half  million  ounces  of  silver  bullion  at  the  market  price, 
and  the  issue  of  Treasury  notes  "  redeemable  on  demand  in 
coin,"  in  payment  for  the  bullion.  The  purchases  under 
this  act  were  168,674,682  fine  ounces  of  silver  at  a  cost  of 
$155,931,002.  These  two  measures  added  to  the  circula- 
tion, therefore,  $534,097,795  in  currency  secured  by  silver, 
although  the  notes  issued  under  the  Act  of  1890  are  redeemed 
in  gold,  and  have  been  treated  in  most  respects  by  the  gov- 
ernment upon  the  same  footing  as  other  United  States  legal 
tender  notes.  The  provision  of  the  Act  of  1890  authorizing 
purchases  of  silver  bullion  was  repealed  on  November  i,  1893, 
but  the  portion  repealing  the  Act  of  1878  was  left  in  force, 
so  that  all  purchases  of  silver  ceased  on  that  date.  The 
currency  in  circulation  outside  the  Treasury  on  that  date 
was  $1,718,544,682,  of  which  $498,121,679  was  stated  to  be 
in  gold  coin,  $78,889,309  in  gold  certificates,  $472,710,610 
in  the  two  forms  of  legal  tender  notes,  $384,443,050  in  silver 
and  silver  certificates,  and  only  $197,745,227  in  national 
bank-notes.  The  bank-notes  formed  less  than  one-eighth 
of  the  circulation,  and  the  $11,566,766  in  the  Treasury 
formed  a  much  smaller  proportion  of  the  money  there  held. 
The  redemption  system  established  by  the  national  bank- 
ing act  of  June  3,  1864,  provided  for  redemption  in  lawful 


374          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

money  of  the  United  States  at  the  office  of  the  issuing  bank 
and  at  some  designated  bank  in  a  reserve  city.  The  banks 
of  the  reserve  cities  were  required  to  have  a  redemption  agent 
in  New  York.  The  fact  that  the  notes  could  be  redeemed 
only  in  government  paper  money,  which  was  of  no  greater 
value  than  the  notes,  prevented  any  general  movement  for 
redemption  and  gradually  filled  the  channels  of  circulation 
with  worn  and  mutilated  currency.  The  notes  of  the  banks 
distant  from  the  reserve  cities  drifted  only  slowly  into  the 
redemption  agencies  and  they  were  rarely  sent  at  the  expense 
of  the  bank  which  received  them  to  the  issuing  bank  for 
redemption.  Several  propositions  were  made  to  enforce 
prompt  redemption,  but  nothing  was  enacted  into  law  until 
1874.  The  banks  were  required  by  an  act  of  that  year  to 
pay  into  the  Treasury  of  the  United  States  a  fund  equal  to 
five  per  cent,  of  their  circulation,  which  was  to  be  constantly 
kept  good,  for  the  redemption  of  mutilated  notes.  Mutilated 
notes  received  by  any  of  the  banks  or  the  sub-Treasuries 
were  to  be  sent  to  Washington  for  redemption  and  the 
expenses  of  the  entire  redemption  agency  and  of  the  trans- 
portation of  the  notes  were  charged  against  the  banks  and 
then  taken  from  the  five  per  cent.  fund. 

Redemptions  under  the  new  system  have  been  sufficiently 
rapid  to  withdraw  notes  which  are  badly  worn,  but  have  not 
been  rapid  enough  to  give  elasticity  to  the  volume  of  the 
currency.  Where  redemptions  under  the  Suffolk  system, 
with  a  circulation  of  $40,000,000,  were  $400, 000,000  per  year, 
redemptions  under  the  national  system  have  never  been 
higher  than  $242,885,375  with  a  maximum  circulation  of 
$355,448,578,  and  have  averaged  less  in  recent  years  than 
$100,000,000  with  a  circulation  in  the  neighborhood  of  $200,- 
000,000.  The  aggregate  redemptions  of  national  bank-notes 
for  the  twenty-two  years  ending  June  30,  1896,  were  $2,543,- 
967,746.  The  annual  redemptions  under  the  Suffolk  system, 
therefore,  were  ten  times  the  circulation,  while  those  under 
the  national  system  have  been  less  than  one-half  of  the 
circulation.  The  economy  of  management  was  greatly  in 
favor  of  the  Suffolk  system.  The  charges  for  twenty-two 


THE  NATIONAL  BANKING  SYSTEM.  375 

years  under  the  national  system  were  $3,773,879,  or  an 
average  of  about  $172,000  per  year.  The  charge  has  been 
reduced  in  recent  years,  in  more  rapid  proportion  than  the 
reduction  of  the  circulation,  so  that  the  rate  is  now  below 
this  average.  The  cost,  however,  under  the  Suffolk  system 
was  about  ten  cents  per. $1000,  while  under  the  national 
system  the  lowest  rate  (in  1896)  was  about  seventy-five  cents 
per  $1000.  This  does  not  include  the  costs  of  transporta- 
tion, which  are  charged  against  the  banks. 

The  original  banking  act  authorized  the  Comptroller  of 
the  Currency  to  appoint  suitable  persons  to  make  examina- 
tions of  the  affairs  of  the  banks  at  such  times  as  the  Comp- 
troller thought  proper  and  to  make  a  full  report  to  him. 
These  officials  were  to  be  paid  by  the  banks,  but  the  expense 
was  a  charge  levied  by  the  Comptroller,  and  fixed  by  him, 
so  that  it  did  not  make  the  examiner  in  any  way  subservient 
to  the  bank.  Examinations  were  originally  made  on  an 
average  of  about  once  a  year,  and  other  information  was  ob- 
tained by  the  Comptroller  from  four  reports  of  condition  re- 
quired during  the  year,  not  at  the  end  of  each  quarter,  but 
at  such  dates  as  he  saw  fit  to  designate.  The  frequency  of 
these  reports  was  increased  in  1870  to  five  per  year,  and  the 
examinations  were  gradually  made  more  severe  as  defects  in 
the  existing  system  were  disclosed.  The  same  person  made 
all  the  examinations  within  a  given  district  until  the  spring 
of  1893,  when  Comptroller  Eckels  adopted  the  plan  of  shift- 
ing the  examiners  of  adjoining  districts  from  time  to  time 
and  of  making  two  examinations  during  the  year  instead  of 
one.  The  original  purpose  of  the  system  of  examination 
was  the  protection  of  the  government  and  of  the  stockhold- 
ers against  palpable  fraud,  and  was  not  intended  to  remit  in 
any  degree  the  vigilance  of  the  directors  of  the  banks.  The 
public  came  by  degrees  to  look  more  and  more  to  the  gov- 
ernment examinations  for  the  assurance  of  the  soundness  of 
the  banks,  and  the  system  has  become  one  of  the  most  im- 
portant and  characteristic  features  of  American  banking. 

The  rapid  expansion  of  the  banking  business  of  the  coun- 
try is  indicated  in  the  following  table,  showing  the  number 


376 


HISTORY  OF  MODEKN  BANK'S  OF  ISSUE. 


of  national  banks,  with  their  discounts  and  individual  de- 
posits at  dates  near  the  beginning  of  each  year  from  the 
organization  of  the  system  to  the  present  time  :  * 


YEAR. 

NO.  OF  BANKS. 

LOANS  AND  DISCOUNTS. 

INDIVIDUAL  DEPOSITS. 

1864 

139 

$  io,666,T)95 

$    19,450,492 

1865 

638 

166,448,718 

183,479,636 

1866 

1,582 

500,650,109 

522,507,829 

1867 

1,648 

608,771,799 

558.699,768 

1868 

1,642 

616,603,479 

534,704,709 

1869 

1,628 

644,945,039 

568,530,934 

1870 

1.615 

688,875,203 

546,236,881 

1871 

1,648 

725,515,538 

507,368,6l8 

1872 

1,790 

818,996,311 

596,536,487 

1873 

1,940 

885,653,449 

598,114,679 

1874 

1,976 

856,816,555 

540,510,602 

1875 

2,027 

955,862,580 

682,846,607 

1876 

2,086 

962,571,807 

618,517,245 

1877 

2,082 

929,066,408 

619,350,223 

1878 

2,074 

881,856,744 

604,512,514 

1879 

2,051 

823,906,765 

643,337,745 

1880 

2,052 

933,543,661 

755,459,966 

1  88  1 

2,095 

,071,356,141 

,006,452,852 

1882 

2,l64 

,169,177,557 

,102,679,163 

1883 

2,3O8 

,230,456,213 

,O66,9OI,7I9 

1884 

2,529 

,307,491,250 

,106,453,008 

1885 

2,664 

,234,202,226 

987,649,055 

1886 

2,732 

1,343,517,559 

,111,429,914 

1887 

2,875 

,470,157,681 

,l69,7l6,4I3 

1888 

3,070 

,583,941,484 

,235,757,941 

1889 

3,150 

1,676,554,863 

,331,265,617   ' 

1890 

3,326 

1,811,686,891 

,436,402,685 

1891 

3,573 

1,932,393,206 

,485,095,855 

1892 

3,692 

2,001,032,625 

,602,052,766 

1893 

3,784 

2,166,615,720 

,764,456,177 

1894 

3,787 

1,871,^74,769 

,539,399,795 

1895 

3,737 

1,974,623,974 

,695,489,346 

1896 

3,706 

2,020,961,792 

,720,550,241 

1  These  figures  are  taken  from  the  reports  of  condition  called  for  by 
the  Comptroller  and  the  dates  are  those  of  the  reports  nearest  to  the 
first  day  of  the  year  for  which  they  are  given.  Reports  were  called 
for  during  the  early  days  of  January  up  to  1870,  since  which  time 
they  have  usually  been  called  for  late  in  December  or  not  until  late 
in  February.  The  reports  for  December  of  the  preceding  year  are 
taken  in  these  cases,  as  representing  more  nearly  the  condition  on  Jan- 
uary ist,  than  those  of  several  weeks  later.  The  earliest  of  these  De- 
cember reports  was  December  i6th  in  1871,  but  most  of  them  were  for 
the  last  two  or  three  days  of  the  month.  The  growth  of  deposits  in 
recent  years  in  State  and  savings  banks  is  shown  in  Chapter  xxiii. 


THE  NATIONAL  BANKING  SYSTEM.  377 

The  suspension  of  purchases  of  silver  bullion  and  the  issue 
of  circulating  notes  tinder  the  Sherman  law  left  the  United 
States,  in  view  of  the  limitations  of  the  national  bank-note 
circulation,  without  any  means  of  materially  increasing 
their  currency.  The  importance  of  a  currency  system  more 
adapted  to  commercial  needs,  and  capable  of  greater  expan- 
sion in  the  South  and  West,  was  under  discussion  among 
Democratic  leaders  for  several  years  before  the  panic  of  1893 
and  began  to  assume  definite  shape  during  the  discussion  on 
the  repeal  of  the  Sherman  law.  It  was  believed  by  many 
that  the  clamor  for  the  free  coinage  of  silver  was  largely 
stimulated  by  the  lack  of  an  elastic  circulating  medium  in 
the  newer  sections  of  the  country  and  that  this  clamor 
would  end,  except  in  the  small  silver-producing  States,  if 
such  a  medium  were  provided.  The  democratic  national 
platform,  adopted  at  Chicago,  June  21,  1892,  contained  the 
declaration,  "We  recommend  that  the  prohibitory  ten  per 
cent,  tax  on  State  bank  issues  be  repealed. "  This  declara- 
tion was  not  interpreted  by  conservative  members  of  the 
party  in  the  North  as  a  declaration  for  unconditional  repeal, 
and  when  that  question  was  submitted  to  the  House  of 
Representatives  on  June  6,  1894,  ^  was  rejected  by  a  vote 
of  102  in  the  affirmative  and  172  in  the  negative,  the  nega- 
tive vote  including  74  Democrats,  nearly  all  from  the  Northern 
States. 

The  division  of  opinion  existing  in  the  country  on  the 
banking  problem  was  indicated  by  the  divisions  in  the 
House  Committee  on  Banking  in  the  long  session  of  the 
Fifty-third  Congress  in  the  spring  and  summer  of  1894. 
The  Chairman  of  the  Committee,  Mr.  Springer  of  Illinois, 
declared  himself  at  an  early  date  opposed  to  the  uncondi- 
tional repeal  of  the  tax  on  the  circulation  of  State  banks, 
and  when  a  vote  was  taken  in  committee  the  majority 
were  found  to  agree  with  him.  They  never  reached  an 
agreement  during  the  long  session  of  Congress,  however, 
upon  any  affirmative  measure.  The  Northern  Democrats 
who  appreciated  the  importance  of  currency  reform  presented 
a  number  of  bills  proposing  a  banking  currency.  Mr.  John 


3/8          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

De  Witt  Warner  of  New  York  was  the  most  active  upon 
this  side  and  proposed  the  remission  of  the  tax  on  both 
State  and  national  banks  when  they  conformed  to  certain 
prescribed  conditions.  These  conditions  involved  making 
the  notes  the  first  lien  upon  the  assets,  adequate  provision 
for  redemption  of  notes,  a  paid-up  capital  of  not  less  than 
$50,000,  the  limitation  of  the  circulation  to  75  per  cent,  of 
the  capital,  and  the  payment  of  an  assessment  for  a  guar- 
antee fund  for  the  redemption  of  the  notes.  A  plan  like 
this  was  the  basis  of  most  of  the  measures  for  a  banking 
currency  which  were  offered  by  the  Northern  members,  but 
most  of  the  Southern  Democrats  felt  bound  to  put  themselves 
on  record  in  favor  of  unconditional  repeal  of  the  ten  per 
cent,  tax  in  order  to  prove  their  sincerity  to  their  constituents. 
The  result  was  the  failure  to  agree  upon  any  definite  measure. 
The  necessity  of  some  new  banking  legislation  was  strongly 
urged  upon  President  Cleveland  by  Representative  Gates  of 
Alabama  and  other  prominent  members  of  Congress  while 
the  repeal  of  the  Sherman  law  and  the  tariff  bill  were  pend- 
ing. The  President  spoke  in  an  encouraging  manner  of 
the  necessity  of  currency  reform,  but  he  refrained  from  com- 
plicating the  other  issues  before  Congress  by  any  specific 
recommendations  until  the  meeting  of  the  short  session  on 
December  3,  1894.  The  dissatisfaction  with  the  system  of 
note  issues  authorized  by  the  national  banking  law  and  the 
belief  that  a  different  system  must  be  substituted  had  been 
steadily  growing,  and  the  adoption  of  a  new  system  was 
advocated  by  many  of  the  most  influential  bankers  of  New 
York  and  Boston.  A  convention  of  bankers  at  Baltimore 
on  October  18,  1894,  declared  in  favor  of  permitting  the 
issue  of  circulating  notes  by  existing  national  banks  up  to 
the  amount  of  50  per  cent,  of  their  paid-up  capital,  secured 
by  general  assets  and  by  a  guarantee  fund  deposited  by  the 
banks  with  the  United  States  Treasurer.  This  guarantee 
fund  was  to  be  paid  into  the  Treasury  to  the  amount  of  two 
per  cent,  of  the  circulation  of  the  banks  the  first  year  and 
thereafter  at  the  rate  of  one-half  of  one  per  cent,  per  year  until 
the  entire  amount  was  five  per  cent,  of  the  outstanding  circula- 


THE  NATIONAL   BANKING  SYSTEM.  379 

tion,  and  the  government  was  to  have  a  first  lien  upon  all  the 
assets  of  a  failed  bank,  in  order  to  ensure  the  redemption  of 
the  notes  to  the  holders.  An  emergency  circulation  was  also 
authorized  to  the  amount  of  25  per  cent,  of  the  capital,  sub- 
ject to  a  heavy  tax  upon  the  average  amount  outstanding  for 
the  year.  The  exact  rate  of  this  ''heavy  tax"  was  not 
specified,  but  its  purpose  was  to  compel  the  retirement  of  the 
*' emergency  circulation"  when  the  demand  for  money  was 
not  acute  enough  to  justify  a  high  rate  of  interest.1 

Manifestations  like  these  paved  the  way  for  the  formal 
presentation  of  the  subject  to  Congress  in  the  message  of 
President  Cleveland  and  the  annual  report  of  Secretary 
Carlisle.  The  President  urged  in  emphatic  language  the 
necessity  of  radical  currency  reform,  but  he  left  the  exposi- 
tion of  the  details  to  his  minister  of  finance.  The  need  of 
action  was  emphasized  by  the  large  exports  of  gold  and  the 
continuous  pressure  of  the  redundant  paper  currency  of  the 
government  upon  the  dwindling  gold  reserve.  This  redun- 
dancy of  the  legal  tender  currency  had  stimulated  a  power- 
ful demand  for  its  retirement,  which  was  ably  supported  in 
New  York  by  Mr.  William  Dodsworth  of  the  Journal  of 
Commerce  and  Commercial  Bulletin  and  in  Boston  by  Mr. 
Charles  C.  Jackson.2  Mr.  Carlisle  was  not  a  believer  in  legal 
tender  paper  and  would  probably  have  been  -glad  to  recom- 
mend its  absolute  retirement  by  means  of  a  loan,  but  out  of 
deference  to  possible  opposition  to  such  radical  action  he  con- 
tented himself  with  proposing  the  locking  up  of  the  legal 
tender  notes  as  security  for  the  proposed  new  bank-note  cir- 

1  See  the  interesting  testimony  of  Mr.  Horace  White  before  House 
Committee  on  Banking,  Dec.  u,  1894,  House  Report  1508,  36.  Sess., 
Fifty-third  Congress,  80-100.     Mr.  White  presented  a  bill,  on  his  own 
responsibility,  making  the  tax  on  emergency  circulation  four  per  cent., 
in  addition  to  the  other  taxes  required  on  circulation  in  the  first  year. 

2  The  Democratic  State  Convention  of  Massachusetts,  under  the  in- 
fluence of  John  B.  Russell,  Henry  C.  Thacber,  and  George  Fred.  Wil- 
liams, adopted  a  resolution  demanding  "that  the  government  shall, 
with  the  development  of  a  banking  system  adequate  to  the  demands 
of  trade,  retire  as  rapidly  as  possible  all  its  legal  tender  paper  money." 
The  demand  was  reiterated  in  the  Democratic  State  platform  of  1895. 


380          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

dilation,  in  much  the  same  way  in  which  the  Canadian 
banks  are  required  to  hold  forty  per  cent,  of  their  circula- 
tion in  Dominion  notes.  Mr.  Carlisle's  propositions  for 
currency  reform  may  be  summarized  in  their  important 
features  as  follows  : 

1.  Repeal  all  laws  requiring,  or  authorizing,  the  deposit 
of  United  States  bonds  as  security  for  circulation. 

2.  Permit  national  banks  to  issue  notes  to  an  amount  not 
exceeding  seventy-five  per  centum  of  their  paid-up  and  un- 
impaired capital,   but   require  each   bank   before  receiving 
notes  to  deposit  a  guarantee  fund  consisting  of  United  States 
legal  tender  notes,  including  Treasury  notes  of  1890,  to  the 
amount  of  thirty  per  centum  upon  the   circulating  notes 
applied  for. 

3.  Retain  the  provision  of  the  law  making  stockholders 
individually  liable,  and  provide  that  the  circulating  notes 
shall  constitute  a  first  lien  upon  all  assets  of  the  bank. 

4.  No  national  bank-note  to  be  of  less  denomination  than 
ten  dollars,  and  all  notes  of  the  same  denomination  to  be 
uniform  in  design  ;  but  banks  desiring  to  redeem  their  notes 
in  gold  may  have  them  made  payable  in  that  coin. 

5.  Require  each  national  banking  association  to  redeem  its 
notes  at  its  own  office,  or  at  its  own  office  and  at  agencies  to 
be  designated  by  it. 

6.  Provide  a  safety  fund  by  taxation  upon  the  banks  for 
the  immediate  redemption  of  the  circulating  notes  of  failed 
banks  and  require  the  legal  tender  guarantee  fund  of  a  failed 
bank  to  be  paid  into  the  safety  fund.     The  safety  fund  may 
be  invested  in  outstanding  United  States  bonds  having  the 
longest  time  to  run,  the  bonds  and  the  interest  upon  them  to 
be   held  as  part  of  the   fund  and  sold  when  necessary  to 
redeem  notes  of  failed  banks. 

7.  Repeal  all  provisions  of  the  law  requiring  banks  to  keep 
a  reserve  on  account  of  deposits. 

8.  The  Secretary  of  the  Treasury  may,  in  his  discretion, 
use  any  surplus  revenue  of  the  United  States  in  the  redemp- 
tion and  retirement  of  United  States  legal  tender  notes,  but 
such   redemptions   shall   not   in   the  aggregate   exceed   an 


THE   NATIONAL   BANKING   SYSTEM.  381 

amount  equal  to  seventy  per  cent,  of  the  additional  circula- 
tion taken  out  by  national  and  State  banks. 

9.  Suspend  the  ten  per  cent,  tax  on  the  circulation  of 
banks  duly  organized  under  the  laws  of  any  State,  transact- 
ing no  other  than  a  banking  business,  and  complying  with 
the  second  and  third  provisions  just  named  and  promptly 
redeeming  their  notes  at  the  principal  offices  and  branches. 
The  guarantee  fund  in  United  States  legal  tender  notes 
was  to  be  permitted  to  be  kept  by  the  State  banks  in  their 
own  custody,  but  must  at  all  times  equal  thirty  per  cent,  of 
the  outstanding  circulation.1 

These  propositions,  embodying  the  essential  principles  of 
an  elastic  banking  currency,  were  cordially  approved  by 
many  bankers  and  financial  journals,  but  the  presentation 
of  a  bill  to  carry  them  out,  prepared  by  Mr.  Carlisle,  led  to 
an  acrimonious  discussion  in  which  party  politics  were 
largely  involved,  and  in  which  the  merits  of  the  general 
scope  of  the  plan  were  so  much  obscured  by  criticism  of 
details  that  many  bankers  who  were  not  opposed  to  a  bank- 
ing currency  became  hostile  to  any  immediate  legislation  on 
the  subject.  Mr.  Carlisle  himself  appeared  before  the  bank- 
ing committee  in  support  of  his  bill  and  the  other  witnesses 
who  appeared  for  or  against  the  measure  included  some  of 
the  most  eminent  bankers  of  the  country.  The  Committee 
on  Banking  closed  the  hearings  on  December  15,  1894,  and 
voted  on  that  day  to  report  Mr.  Carlisle's  bill  to  the  House, 
with  some  amendments.  The  Republican  members  did  not 
concur  in  reporting  the  bill  or  in  closing  the  hearings  so 
promptly.  Several  of  the  Democrats  also  were  opposed  to 
details  of  the  measure,  but  were  willing  to  have  it  reported 
for  consideration.  It  was  contended  by  Mr.  Sperry  of  Con- 
necticut and  other  members  that  the  bill  did  not  meet  the 
most  pressing  financial  necessity  of  the  hour,  which  was  the 
retirement  of  legal  tender  notes  and  provision  for  the  pro- 

1  Most  of  these  propositions  are  quoted  verbatim  from  the  annual 
report  of  the  Secretary  of  the  Treasury  to  Congress  (pp.  Ixxvi-viii), 
but  it  has  been  necessary  to  omit  subsidiary  features  and  details  which 
are  the  natural  complement  of  the  principles  laid  down. 


382          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

tection  of  the  gold  reserve.  Mr.  Sperry  and  Mr.  Warner  of 
New  York  united  in  a  request,  at  the  meeting  of  democratic 
members  of  the  committee  on  December  2Oth,  that  provision 
be  made  for  the  continuance  of  the  existing  system  of  note 
circulation,  in  order  not  to  compel  too  sudden  a  transition  to 
the  new  system,  and  that  the  provision  imposing  unlimited 
liability  upon  the  banks  for  the  redemption  of  the  notes  of 
failed  banks  be  modified.  Both  of  these  changes  were 
accepted  by  the  majority. 

Chairman  Springer  of  the  Committee  on  Banking  intro- 
duced a  substitute  for  the  original  bill  on  December  2ist, 
embodying  the  various  amendments  which  had  the  consent 
of  Secretary  Carlisle.  A  caucus  of  democratic  members  of 
the  House  was  held  on  January  7,  1895,  and  it  was  voted, 
8 1  to  59,  to  proceed  with  the  consideration  of  the  bill  in  the 
House.  This  vote  was  not  encouraging  to  the  advocates  of 
a  banking  currency,  because  it  was  known  that  the  Repub- 
licans would  oppose  the  bill  and  that  they  would  constitute, 
with  the  minority  of  Democratic  members,  a  majority  of  the 
House.  It  was  found  that  the  extreme  silver  men  would 
not  support  the  bill  and  they  cast  a  vote  of  54  against  64  in 
the  caucus  for  a  substitute  measure,  offered  by  Mr.  Terry  of 
Arkansas,  to  authorize  the  Treasury  to  issue  notes  upon 
silver  bullion  deposited  by  the  various  States.  Some  of  the 
more  moderate  silver  men  were  willing  to  abide  by  the 
decision  of  the  majority  of  the  party,  but  tlreir  votes  were 
offset  by  those  of  Eastern  members  who  did  not  consider 
the  committee  bill  sufficiently  guarded  in  its  provisions. 
The  belief  that  the  bill  could  not  pass  the  House  was  verified 
when  the  vote  was  taken  on  January  9th  on  the  question  of 
consideration.  The  affirmative  vote  was  122  and  the  nega- 
tive vote  was  129.  This  margin  might  have  been  overcome 
if  all  those  voting  for  consideration  could  have  been  trusted 
to  support  the  bill,  but  it  was  well  known  that  a  considerable 
number  of  them  would  not  vote  for  the  measure  on  its 
passage.  Some  further  efforts  were  made  among  members 
of  Congress  to  secure  an  agreement  on  a  banking  measure, 
but  they  were  not  successful.  The  subject  of  maintaining 


THE  NATIONAL  BANKING  SYSTEM.  383 

the  government  gold  reserve  became  more  pressing  than 
that  of  banking  reform,  during  the  brief  period  remaining 
before  the  termination  of  the  session  of  Congress  on  March 
4,  1895,  and  was  the  subject  of  the  bills  subsequently 
reported  by  the  Banking  Committee. 

The  Fifty-fourth  Congress,  which  met  on  December  2, 
1895,  contained  majorities  politically  hostile  to  the  adminis- 
tration of  President  Cleveland.  This  fact  and  the  continued 
danger  of  the  gold  reserve  led  the  President  in  his  message, 
and  the  Secretary  in  his  annual  report,  to  make  the  subject 
of  the  maintenance  of  the  gold  reserve  paramount  to  sugges- 
tions of  radical  changes  in  the  banking  laws.  Secretary 
Carlisle  simply  renewed  the  recommendations,  repeatedly 
made  in  former  years  by  the  Comptroller  of  the  Currency, 
that  the  banks  be  given  greater  freedom  of  note  issue  by 
permission  to  issue  circulation  to  the  par  value  of  the  bonds 
deposited  as  security,  and  that  the  tax  on  circulation  be  re- 
duced from  one-half  to  one-quarter  of  one  per  cent,  annually. 
He  pointed  out  that  until  1883  there  was  a  tax  upon  the 
capital  and  deposits  of  national  banks,  as  well  as  a  tax  upon 
their  circulation,  and  that  from  all  these  sources  the  govern- 
ment received  up  to  the  close  of  the  fiscal  year  1895  the  sum 
of  $146,902,962.  From  the  tax  on  circulation  alone  the 
receipts  amounted  to  $78,107,006,  while  the  total  estimated 
expenses  of  supervision,  including  salaries  of  officials,  had 
been  only  $15,636,976.  The  average  annual  cost  of  super- 
vision, declared  the  Secretary,  "  has  been  $473,848,  while  a 
tax  of  one-fourth  of  one  per  cent,  on  the  average  annual 
circulation  would  have  yielded  $680,294."  The  Secretary 
also  stated  that  ' '  The  gain  to  the  government  on  account  of 
national  bank-notes  lost  or  destroyed,  and  which  are  con- 
sequently, never  presented  for  redemption,  is  estimated  to  be 
two-fifths  of  one  per  cent,  upon  the  total  amount  issued,  and 
has,  according  to  this  estimate,  amounted  to  the  sum  of 
$2,805,715."  1 

1  The  amount  of  paper  currency  lost  or  destroyed  and  never  pre- 
sented for  redemption  is  much  smaller  than  is  popularly  believed. 
No  exact  figures  have  ever  been  obtained,  because  notes  of  the  oldest 


384          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

Two  important  changes  suggested  by  Secretar)r  Carlisle 
were  the  transfer  of  the  current  redemption  of  national  bank- 
notes from  the  United  States  Treasury  to  agencies  estab- 
lished by  the  banks  and  designated  by  the  Comptroller  of 
the  Currency,  as  was  the  case"  prior  to  the  Act  of  June  20, 
1874,  and  that  national  banks  be  permitted  to  establish 
branches  for  the  transaction  of  all  kinds  of  business  except 
the  issue  of  notes.  The  Secretary  suggested  as  an  alterna- 
tive plan,  in  case  the  redemption  agency  at  Washington  was 
continued,  that  the  banks  be  required  to  maintain  their  five 
per  cent,  redemption  fund  in  gold  coin  and  to  deposit  gold 
coin  for  the  withdrawal  of  bonds  whenever  circulation  was 
to  be  permanently  surrendered  or  reduced.  This  suggestion 
was  a  part  of  the  policy  of  withdrawing  the  legal  tender 
notes  of  the  government  recommended  by  the  President  and 
Secretary,  and  was  for  the  purpose  of  supplying  the  Treasury 
with  a  proper  medium  for  the  redemption  of  bank-notes  after 
the  retirement  of  the  government  notes.  The  establishment 


issues  are  occasionally  received  for  redemption,  and  even  an  approxi- 
mate estimate  can  be  made  only  upon  issues  of  many  years  standing. 
No  calculation  based  upon  such  issues  has  shown  a  larger  average 
loss,  except  upon  the  small  fractional  currency,  than  one  per  cent, 
and  Secretary  Carlisle's  estimate  of  two-fifths  of  one  per  cent,  is 
probably  not  too  small.  The  percentage  applies,  however,  to  the 
entire  issues  rather  than  to  the  net  amount  in  circulation  at  any  one 
time.  The  entire  issues  of  United  States  notes  up  to  the  close  of  the 
fiscal  year  1895  were  $2,725,981,808,  and  two-fifths  of  one  per  cent,  of 
this  amount  would  be  about  $  10,000,000.  The  total  issues  of  national 
bank-notes  to  October  31,  1895,  were  $1,906,918,995,  and  the  propor- 
tion of  estimated  loss  would  be  about  $7,500,000.  This  loss,  however, 
will  not  be  realized  until  all  the  recent  issues  have  been  many  years 
outstanding,  which  accounts  for  the  variation  from  the  estimate  of 
Mr.  Carlisle.  One  of  the  proofs  of  the  small  percentage  of  loss  upon 
paper  currency  is  furnished  by  the  old  demand  notes,  of  which 
$60,030,000  were  issued  and  only  $54,847,  or  less  than  one-tenth  of 
one  percent.,  were  outstanding  on  June  30,  1895.  These  notes,  how- 
ever, having  been  received  for  customs  in  common  with  gold,  did  not 
remain  so  long  in  circulation  as  some  other  forms  of  paper  currency. 
Of  $i  and  $2  notes  in  circulation  in  Canada  on  June  3,  1871,  less  than 
one  per  cent,  were  outstanding  in  1894. — Breckenridge,  337. 


THE  NATIONAL  BANKING  SYSTEM.  385 

of  branches  by  the  national  banks  was  cordially  approved  by 
the  President. 

Comptroller  Eckels  followed  the  President  and  Secretary 
of  the  Treasury  in  abstaining  from  recommending  a  new 
basis  for  the  issue  of  bank-notes,  but  he  indicated  his  belief 
in  the  policy  of  an  elastic  banking  currency  in  the  following 
terms :  l 

The  advantage  accruing  to  the  Government  by  the  substitution  of  a 
bank-note  for  a  Treasury-note  currency  would  be  immeasurably  great. 
The  need  of  maintaining  a  gold  reserve  to  meet  the  recurring  demand 
obligations,  now  never  retired,  would,  within  a  reasonable  time,  be 
obviated,  and,  delivered  from  this  vexatious  and  expensive  difficulty, 
the  Treasury  Department  could  return  to  its  legitimate  function  of 
collecting  the  revenues  of  the  Government  needful  to  meet  govern- 
mental expenses  and  disbursing  the  same. 

With  the  relief  gained  to  it  through  the  removal  of  this  burden  would 
come  a  greater  one  to  the  business  interests  of  the  individual  citizen, 
whose  every  operation  would  no  longer  be  harassed  by  the  uncertainty 
springing  from  a  fear  that  either  in  the  present  or  the  future  the  cur- 
rency obligations  now  forced  by  his  Government  through  the  provisions 
of  an  inflexible  law  into  the  avenues  of  trade  and  commerce  may  be 
discredited  and  dishonored.  The  relegating  of  note  issuing  entirely  to 
the  banks  would  give  a  better  guarantee  of  meeting  the  varying  wants 
of  trade,  which  is  impossible  with  a  legal  mandate  decreeing  an 
amount  of  Treasury  issues  of  no  greater  and  no  less  volume  at  one 
season  of  the  year  than  another,  whether  or  no  there  be  a  correspond- 
ing increase  or  lessening  of  the  demand  for  currency  to  transact  the 
business  in  hand. 

1  Comptroller's  Report,  1895,  23.  ^ 

" 


CHAPTER  XVI. 

THE   CANADIAN   BANKING  SYSTEM. 

Its  Origin  and  Growth — Foundation  of  the  Bank  of  Montreal — The 
Union  of  the  Canadian  Provinces  and  the  Dominion — Banking^ 
Reforms  in  1870,  1880,  and  1890 — The  Effect  upon  the  Security 
of  Note  Issues  and  the  Small  Losses  by  Failure — Recent  Sus- 
pensions. 

THE  Canadian  banking  laws  now  in  force  represent  an 
almost  steady  growth  from  comparatively  crude  con- 
ditions to  a  perfected  scientific  system.  Founded 
originally  upon  Scotch  models,  the  Canadian  banks  enjoyed 
at  first  the  freedom  from  even  the  police  supervision  of  the 
government  which  naturally  arose  from  the  fact  that  they 
framed  their  own  charters.  Canadian  banking  was  not 
exempt  from  the  risks  and  difficulties  of  the  other  institu- 
tions of  a  new  and  growing  country,  and  defects  in  the  secur- 
ity of  the  note  issues  and  the  protection  of  deposits  were 
gradually  remedied  as  they  were  disclosed  by  experience. 
The  development  of  the  Canadian  system,  however,  has 
been  natural  and  symmetrical  and  most  of  the  changes  in 
the  law  have  had  the  approval  of  the  leading  bankers.  At- 
tempts have  been  several  times  made  to  substitute  a  govern- 
ment currency  or  a  specially  secured  circulation  for  the 
elastic  medium  provided  by  the  banks,  but  these  attempts 
have  not  been  sufficiently  successful  to  destroy  the  essential 
advantages  of  the  Canadian  banking  system.  They  have 
resulted  in  putting  a  considerable  volume  of  government 
paper  alongside  the  bank-note  currency  and  in  requiring  a 
certain  percentage  of  this  paper  to  be  held  by  the  banks  in 

386 


THE   CANADIAN  BANKING   SYSTEM.  387 

their  cash  reserves,  but  they  have  not  supplanted  the  bank- 
note currency  and  are  not  likely  to  be  permitted  to,  unless 
the  necessities  of  the  government  in  time  of  war  should  be- 
come paramount  to  the  commercial  interests  of  the  country. 

The  history  of  Canada  is  that  of  several  separate  provinces 
before  the  union  in  1841.  The  movement  for  better  banking 
facilities  began  independently,  but  almost  simultaneously  in 
each  province  early  in  the  present  century.  The  scarcity  of 
specie  or  of  any  other  circulating  medium  in  L,ower  Canada 
was  partially  supplied  by  the  "Army  bills"  issued  by  the 
government  during  the  war  with  the  United  States  and  it 
was  not  until  1817  that  a  banking  company  was  formed.1 
Previous  attempts  to  found  a  bank  had  been  addressed  to 
the  local  legislature  of  Lower  Canada,  but  on  June  23,  1817, 
a  meeting  was  held  at  Montreal  at  which  an  association  was 
formed  with  a  capital  stock  of  ^250,000.  An  office  was 
opened  in  August  under  the  title  of  the  Bank  of  Montreal, 
without  waiting  for  legal  authority,  and  what  afterwards 
became  the  strongest  institution  of  the  Dominion  was  thus 
established.  The  bank  was  simply  a  private  partnership, 
with  unlimited  liability  of  the  shareholders,  and  continued  so 
until  the  passage  of  a  charter  by  the  legislature  on  March 
17,  1821,  which  was  approved  by  the  royal  government  and 
proclaimed  on  July  22,  1822. 

Charters  for  the  Quebec  Bank  and  the  Bank  of  Canada, 
situated  at  Montreal,  were  passed  at  the  same  session  of  the 
legislature  and  their  approval  by  royal  authority  was  pro- 
claimed on  November  30,  1822.  The  Quebec  Bank  had  been 
organized  in  a  similar  manner  to  the  Bank  of  Montreal  on 
July  9,  1818,  with  a  capital  of  ,£75,000,  and  the  Bank  of 
Canada  had  been  organized  on  August  25,  1818,  with  a  capi- 
tal of  ^200,000.  The  charter  of  the  Bank  of  Montreal, 
whose  provisions  were  followed  in  the  charters  of  the  other 
two  banks,  gave  the  institution  corporate  powers  until  June 

1  The  Army  bills  outstanding  at  the  close  of  the  war  in  March,  1815, 
were  ^"1,249,996,  but  they  were  receivable  for  public  dues  and  con- 
vertible into  government  bills  of  exchange  on  London,  and  were  re- 
duced by  May,  1816,  to  ^200,000. 


388          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

i,  1831,  and  provided  for  the  choice  of  thirteen  directors, 
who  must  be  British  subjects  and  holders  of  at  least  four 
shares  each.  The  principle  of  limited  liability  was  applied 
to  the  shareholders,  without  any  obligation  beyond  the 
amount  of  their  subscription  to  the  stock,  but  the  directors 
were  to  be  liable  to  the  stockholders  as  well  as  to  the  holders 
of  bank-notes  in  case  the  debts  of  the  corporation  should  ex- 
ceed treble  the  amount  of  the  capital  stock  actually  paid  in, 
exclusive  of  the  deposits.  The  bank  was  prohibited  from 
lending  on  land  or  mortgage,  but  might  take  such  property 
for  debt  contracted  in  the  course  of  its  legitimate  dealings. 

The  fact  that  the  acts  passed  by  the  provincial  legislature 
for  the  incorporation  of  these  banks  were  based  upon  the 
articles  of  agreement  drawn  by  the  incorporators  made  the 
restrictions  trifling  which  were  imposed  upon  the  banks. 
There  was  no  limit  upon  the  volume  of  note  issues  except 
the  general  liability  of  the  directors  for  the  aggregate  indebt- 
edness. There  was  no  prohibition  upon  loans  upon  the 
stock  of  the  bank  or  upon  loans  to  directors.  The  fact, 
however,  that  each  bank  was  established  by  a  special  law 
afforded  some  measure  of  protection  against  indiscriminate 
private  banking  and  there  was  a  disposition  from  the  outset 
to  adhere  closely  to  Scotch  methods.1  An  indication  of  this 
is  given  by  the  prompt  establishment  of  branches  by  the 
Bank  of  Montreal  at  Quebec  and  by  both  the  Bank  of  Mon- 
treal and  the  Bank  of  Canada  at  Kingston  in  the  upper 
province.  The  banks  received  the  notes  of  their  competitors 
and  exchanged  them  and  settled  the  balances  in  specie  as 
often  as  once  a  week,  according  to  the  Scotch  system.  The 
Bank  of  Montreal  employed  an  agent  in  New  York  for  the 
negotiation  of  sterling  exchange  and  all  the  Canadian  banks 
of  importance  eventually  had  an  agent  or  correspondent  in 
the  American  metropolis. 

1  Mr.  R.  M.  Breckenridge,  in  his  admirable  work,  The  Canadian 

Banking  System,  published  by  the  American  Bconomic  Association, 

from  which  many  of  these  facts  regarding  early  Canadian  banking 

.  are  taken,  states  that  among  140  odd  charter  members  of  the  Bank 

of  Montreal  there  were  at  least  90  Scotch  names. 


THE   CANADIAN  BANKING   SYSTEM.  389 

The  importance  of  freedom  of  note  issues  in  developing 
banking  in  a  new  country  is  indicated  by  the  early  returns 
of  the  Canadian  banks,  in  spite  of  the  considerable  deposits 
which  they  were  able  to  obtain.  The  total  deposits  of  the 
three  banks  of  the  lower  province  in  1824  were  ,£135,426, 
while  the  circulation  was  ,£167,498 ;  the  deposits  in  1825 
were  ,£151,637  and  the  notes  in  circulation  ,£177,454  ;  the 
deposits  in  1826  were  ,£176,475  and  the  notes  ,£193,548. 
The  debts  due  to  the  banks,  which  may  be  assumed  to 
represent  chiefly  the  discounts,  were  ,£529,363  in  1824, 
.£585,265  in  1825,  and  ,£594,515  in  1826.  The  debts  due  the 
Montreal  Bank  in  the  latter  year  were  .£371,334;  Quebec 
Bank,  ,£111,523;  and  Bank  of  Canada,  ,£111,658.  The 
banks  secured  the  renewal  of  their  charters  in  1830  and  1831, 
until  June  i,  1837.  The  legislation  of  this  time  cut  off 
possible  note  issues  by  private  bankers,  by  prohibiting  notes 
payable  to  bearer  except  when  issued  by  banks  incorporated 
by  law  in  Lower  Canada.  The  tptal  amount  of  notes  in 
circulation  for  less  than  $5  was  limited  to  one-fifth  the  capi- 
tal stock  of  the  Bank  of  Montreal  and  notes  for  less  than  five 
shillings  were  prohibited.  Similar  limitations  were  imposed 
upon  the  Quebec  Bank  and  the  power  was  reserved  to  the 
legislature  to  prohibit  or  limit  entirely  the  circulation  of 
notes  under  $5. 

The  Bank  of  Canada  found  its  business  falling  off  in  1825 
and  after  gradually  reducing  its  capital  stock  went  into 
liquidation  in  1831,  upon  the  lapse  of  the  charter.  The 
bank  did  not  fail  or  suspend  payments,  but  adopted  a  policy 
of  paying  uncurrent  and  underweight  coin,  which  led  the 
Bank  of  Montreal  to  refuse  its  checks  and  notes  and  caused 
the  rapid  reduction  of  deposits  until  it  became  unprofitable 
to  continue  business.  A  charter  was  granted  to  the  City 
Bank  of  Montreal  in  1831,  upon  the  representation  of  lead- 
ing merchants  that  the  capital  of  the  existing  bank  was 
"  altogether  inadequate  to  the  circulation  of  the  valuable 
articles  of  import  and  export  which  its  geographic  position 
naturally  brings  to  it,"  and  that  the  most  effectual  preven- 
tive of  the  evil  of  monopoly  <c  is  the  admission  of  reasonable 


390          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

competition,  with  its  counteracting  influence."  Another 
Montreal  bank  began  business  in  1835  under  the  title  of  the 
Banque  du  Peuple  (Bank  of  the  People).  The  principal  part- 
ners were  Messrs.  Viger,  De  Witt,  and  Co.,  who  were  fully 
liable  for  the  debts  of  the  bank,  while  shares  were  issued  to 
persons  having  no  share  in  the  management  and  liable  only 
for  the  amount  of  their  stock,  according  to  the  French 
system  of  partnership  en  com mandite. 

The  movement  for  a  bank  in  Upper  Canada,  now  consti- 
tuting the  Province  of  Ontario,  assumed  definite  shape  a 
trifle  earlier  than  in  Lower  Canada,  but  the  first  charter 
passed  by  the  provincial  legislature  did  not  receive  the  royal 
assent  within  the  period  provided  by  the  charter  to  give  it 
validity,  so  that  it  became  necessary  to  pass  a  new  charter  in 
1819.  The  royal  government  again  delayed  action,  but  the 
Bank  of  Upper  Canada,  situated  at  Kingston,  was  finally 
authorized  by  proclamation  of  the  royal  assent  on  April  21, 
1821,  more  than  a  year  before  such  assent  was  granted  for 
the  banks  of  Lower  Canada.  The  capital  of  the  bank  was 
originally  fixed  at  ,£200,000,  but  this  was  reduced  in  1823  to 
,£100,000.  The  general  provisions  of  the  charter  were  simi- 
lar to  those  of  the  banks  of  Lower  Canada,  but  notes  under 
five  shillings  were  forbidden  from  the  outset  and  the  charter 
was  to  remain  in  force  until  June  i,  1848.  The  government 
subscribed  for  2,000  shares  of  the  capital  at  a  par  value  of 
,£25,000.  A  practical  monopoly  of  note  issues  was  conferred 
upon  the  bank  in  1823  by  an  act  prohibiting  banks  from 
carrying  on  business  in  the  province,  which  did  not  redeem 
their  notes  in  specie  within  its  limits.  The  development  of 
Upper  Canada  was  somewhat  more  rapid  after  the  establish- 
ment of  the  bank  than  before,  from  a  combination  of  causes, 
and  the  capital  stock  actually  paid  in  increased  from  ,£10,- 
640  in  1823  to  the  full  limit  of  ,£100,000  in  1830.  The  debts 
due  by  the  bank  increased  from  ,£107,598  on  December  15, 
1826,  to  .£260,557  on  January  i,-i83i,  and  the  notes  in  circu- 
lation increased  during  the  same  interval  from  ,£87,339  to 
.£187,039.  The  bank  encountered  only  the  rivalry  of  an 
institution  purporting  to  be  the  Bank  of  Upper  Canada  under 


THE   CANADIAN  BANKING  SYSTEM.  39! 

a  forfeited  character,  which  soon  collapsed,  until  the  incor- 
poration in  1832  of  the  Commercial  Bank  of  the  Midland 
district.  The  capital  of  the  new  bank  was  fixed  at  ,£100,000. 
The  capital  of  the  Bank  of  Upper  Canada  was  increased  by 
a  like  amount  at  the  same  session,  and  the  utmost  eagerness 
was  shown  to  purchase  the  stock.  The  Commercial  Bank 
within  three  years  sought  and  obtained  power  to  double  its 
capital  stock  and  an  act  was  passed  incorporating  the  Gore 
Bank  at  Hamilton  with  a  capital  of  ;£ioo,ooo. 

The  first  bank  charter  in  New  Brunswick  received  the 
royal  assent  as  early  as  March  25,  1820.  The  institution 
was  known  as  the  Bank  of  New  Brunswick  and  was  located 
at  St.  John,  with  a  capital  of  ,£50,000.  The  shareholders 
were  liable  only  for  the  principal  of  their  stock,  and  debts 
by  the  directors,  either  as  principals  or  indorsers,  were  lim- 
ited to  one-third  of  the  paid-up  capital.  The  banks  were 
forbidden  by  an  Act  of  1838  to  issue  notes  of  a  less  denomi- 
nation than  five  shillings.  The  first  bank  of  issue  actually 
established  in  Nova  Scotia  was  opened  in  1825  at  Halifax 
under  the  title  of  the  Halifax  Banking  Company.  The 
Bank  of  Nova  Scotia,  which  was  the  first  chartered  bank, 
was  incorporated  by  an  Act  approved  March  30,  1832,  with 
an  authorized  capital  of  ,£100,000.  The  bank  was  without 
a  chartered  competitor  for  five  years  and  during  its  first  ten 
years  divided  profits  among  the  shareholders  at  the  average 
rate  of  8.9  per  cent,  and  increased  its  capital  to  ,£140,000. 
The  issue  of  bank-notes  for  less  than  ,£5  was  prohibited  in 
Nova  Scotia  in  1834. 

The  banking  system  of  the  Canadian  provinces  was  thus 
established  on  a  comparatively  safe  and  scientific  basis, 
similar  to  the  Scotch  system  in  the  part  played  by  the  large 
incorporated  banks  and  their  branches,  but  without  any 
serious  control  by  law.  The  history  of  the  next  thirty  years 
involves  a  mania  for  banking  speculation  similar  to  that 
witnessed  in  the  United  States,  on  the  part  of  the  Canadian 
people,  and  an  effort  to  apply  the  rigid  limits  of  the  English 
restriction  act  on  the  part  of  the  home  government  at  Lon- 
don. The  banking  mania  seized  Upper  Canada  and  resulted 


392          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

in  the  creation  of  several  joint  stock  banks  between  1834 
and  1837.  The  creation  of  such  banks  without  a  special 
charter  was  brought  to  a  summary  end  by  an  Act  of  1837, 
prohibiting  the  issue  of  circulating  notes,  except  by  banks 
holding  legislative  charters,  and  making  such  issues  a  misde- 
meanor. The  banking  phrenzy  was  not  checked  by  this 
salutary  regulation.  The  House  of  Assembly  had  passed 
a  bill  in  1833  to  enable  the  Receiver  General  to  issue  notes 
chargeable  on  the  public,  and  a  select  committee  in  1835  re- 
ported in  favor  of  a  provincial  bank,  on  the  basis  of  loans 
guaranteed  by  the  province.  These  measures  alarmed  the 
home  government  and  resulted  in  a  despatch  to  the  Lieuten- 
ant Governor  August  31,  1836,  directing  him  not  to  permit 
any  act  touching  the  circulation  of  promissory  notes  or  the 
law  of  legal  tender  to  come  into  operation  in  Upper  Canada 
without  having  first  received  the  royal  sanction.  This 
precaution  was  taken  none  too  early,  for  bills  were  passed 
during  the  session  of  1836-37  increasing  the  banking  capital 
of  the  province  from  ^"500,000  to  ,£4,500,000  and  conferring 
a  power  of  note  issue  to  the  limit  of  <£i3,5oo,ooo.1  The 
Imperial  government  did  not  formally  disallow  these  acts, 
but  returned  them  to  the  Colonial  legislature  for  more  sober 
consideration.  This  course  was  effective  and  none  of  the 
measures  were  re-enacted. 

The  union  of  Upper  and  Lower  Canada  was  accomplished 
on  February  5,  1841,  under  the  title  of  the  Province  of 
Canada,  and  banking  legislation  was  henceforth  enacted  in 
uniform  terms  for  the  entire  province.  The  government  of 
Upper  Canada  prepared  for  the  union  by  the  sale  of  the 
government  stock  in  the  Bank  of  Upper  Canada  and  the 
separation  of  the  government  from  official  connection  with 
the 'bank.  A  scheme  was  brought  forward  soon  after  the 
union  by  the  Governor  General,  Lord  Sydenham,  for  a  pro- 
vincial bank  of  issue  under  the  direct  authority  of  the  gov- 
ernment. Lord  Sydenham  was  a  personal  friend  of  Lord 
Overstone,  the  great  champion  of  "  the  currency  principle  " 
in  England,  and  endeavored  to  engraft  upon  Canadian 
1  Breckeuridge,  77. 


THE    CANADIAN  BANKING  SYSTEM.  393 

finances  the  separation  of  the  functions  of  note  issue  and 
banking  which  were  imposed  upon  the  Bank  of  England  by 
the  Act  of  1844.  Lord  Sydenham  suggested  a  series  of 
resolutions  for  a  bank,  with  no  other  powers  than  that  of 
issue,  with  an  authorized  circulation  of  ;£  1,000,000  and  an 
excess  issued  only  against  coin  or  bullion.  The  authorized 
circulation  was  to  be  protected  by  government  securities,  of 
which  the  interest  was  to  go  to  pay  the  expense  of  managing 
the  bank  and  any  balance  to  the  public  Treasury.  There 
was  a  strong  outburst  of  public  feeling  against  destroying 
the  profits  and  efficiency  of  the  existing  banks  and  the  con- 
servatives, French  Canadians,  and  a  few  supporters  of  the 
party  in  power,  united  in  committee  of  the  whole  on  August 
31,  1841,  in  a  resolution  "  that  it  is  inexpedient  to  take  into 
further  consideration  during  the  present  session  the  estab- 
lishment of  a  provincial  bank  of  issue,  or  the  issue  in  any 
way  of  a  paper  currency  on  the  faith  of  the  province. ' '  * 

The  committee  which  considered  Lord  Sydenham' s  pro- 
posals admitted  the  propriety  of  some  uniform  regulation  of 
the  banks,  and  it  had  been  repeatedly  urged  in  circulars 
from  the  home  government.  These  recommendations  con- 
templated the  usual  safeguards  against  unsound  banking, — 
limiting  the  business  of  the  banks  to  a  proper  banking 
business,  conducted  after  the  subscription  of  the  capital,  and 
involving  forfeiture  if  specie  payments  were  suspended  for 
sixty  days.  These  restrictions  were  applied  to  the  three 
banks  of  Lower  Canada  when  they  sought  a  renewal  of  their 
charters  in  1841.  Notes  under  five  shillings  were  prohibited, 
and  notes  under  one  pound  were  not  to  exceed  one-fifth  of 
the  paid-up  capital.  The  various  charters  were  to  expire  at 
the  end  of  the  first  session  of  Parliament  after  June  or  De- 
cember i,  1862.  Double  liability  was  imposed  upon  share- 
holders, and  nearly  all  the  provisions  for  the  public  security 
which  had  prevailed  in  either  Lower  or  Upper  Canada  were 
now  applied  to  the  banks  of  the  entire  province.  The  pet 
theory  of  the  home  government,  that  coin  should  take  the 
place  of  small  notes,  in  order  to  constitute  a  healthy  monetary 

1  Breckenridge,  112. 


394          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

system,  led  to  considerable  correspondence  in  1846,  pending 
the  approval  of  a  charter  passed  in  that  year,  but  the  gov- 
ernment finally  consented  to  the  retention  of  the  $i  notes. 

The  mania  for  "  free  banking"  on  securities  seized  upon 
the  Canadian  people  towards  the  middle  of  the  century  and 
resulted  in  the  law  of  1850,  based  upon  New  York  models. 
William  Hamilton  Merritt  was  the  author  of  the  new  law, 
and  he  first  brushed  away  the  obstacles  by  the  repeal  of  the 
laws  prohibiting  the  circulation  of  the  notes  of  private  bank- 
ers. Such  note  issues  were  permitted,  provided  that  the 
banks  formed  for  the  purpose  deposited  Provincial  securities 
with  the  Receiver- General  for  not  less  than  $100,000  as  a 
pledge  for  their  notes.  One  of  the  objects  of  this  legisla- 
tion,— to  broaden  the  market  for  Provincial  securities, — was 
indicated  by  the  provision  that  these  notes  were  to  be  exempt 
from  the  tax  of  one  per  cent,  per  year  imposed  on  the  circu- 
lation of  the  chartered  banks,  and  that  the  latter  might 
surrender  their  circulation  against  their  assets,  and  issue 
notes  upon  deposits  of  securities.  The  notes,  in  case  of 
suspension,  were  to  be  paid  from  the  proceeds  of  the  securi- 
ties, and  any  balance  was  to  be  applied,  with  the  other  assets, 
to  the  settlement  of  the  remaining  debts  of  the  bank.  The 
notes  were  to  constitute  a  preferred  claim  against  other  as- 
sets in  case  the  proceeds  of  the  securities  proved  insufficient. 

The  effort  to  drive  the  chartered  banks  into  the  secured 
note  system  was  carried  further,  in  1851,  by  a  bill  granting 
certain  exemptions  from  taxation  to  banks  which  were  will- 
ing to  restrict  their  circulation  to  the  maximum  showrn  in 
their  last  statement  and  to  reduce  it  in  three  years  to  three- 
fourths  of  the  average  for  1849  and  1850.  Such  banks  were 
permitted  to  issue  additional  notes  to  the  amount  held  in 
gold  or  silver  coin  or  bullion,  or  in  debentures  issued  by  the 
Receiver-General  and  reckoned  at  par.  They  were  not  re- 
quired to  deposit  the  debentures,  but  were  required  in  case 
of  failure  to  apply  them  exclusively  to  the  redemption  of 
their  notes.  The  fact  that  the  banks  were  required  to  hold 
the  debentures  permanently,  whether  in  the  custody  of  the 
government  or  in  their  own  vaults,  resulted  in  withdrawing 


THE   CANADIAN  BANKING  SYSTEM.  395 

active  capital  from  commercial  banking  and  offering  insuffi- 
cient inducement  to  investors  of  banking  capital.  Five 
banks  were  created  under  the  law,  of  which  two  soon  disap- 
peared and  three  were  continued  under  special  charters. 
The  Bank  of  British  North  America,  which  operated  in  all 
the  provinces  under  a  royal  charter,  apparently  obtained  the 
greatest  advantages  from  the  secured  note  system  by  employ- 
ing it  prudently  in  connection  with  its  other  business.  The 
failure  of  the  "Free  Banking  Act "  was  acknowledged  as 
early  as  1859,  but  it  was  not  repealed  until  the  passage  of 
the  Provincial  Note  Act  of  1866. 

•  The  temptation  to  use  the  power  of  note  issue  for  the 
benefit  of  the  State  assailed  the  provincial  authorities  again 
in  1866,  when  the  government  found  themselves  compelled 
to  raise  about  $5,000,000  to  discharge  the  floating  debt. 
Mr.  A.  T.  Gait,  Minister  of  Finance,  succeeded  in  carrying 
a  bill,  which  received  the  royal  assent  August  15,  1866, 
assuming  the  power  of  the  Province  to  issue  not  more  than 
$8,000,000  of  notes,  payable  on  demand  in  specie  at  Montreal 
or  Toronto  and  legal  tender  except  at  those  offices.  He  did 
not  dare  propose  the  immediate  abolition  of  the  bank-note 
currency,  but  proposed  an  indemnity  payment  by  the  gov- 
ernment of  five  per  cent,  per  year,  on  the  amount  of  notes 
outstanding  on  April  30,  1866,  until  the  expiration  of  the 
charter  of  any  bank  which  might  accept  the  conditions  of 
the  act  and  withdraw  its  own  circulation  before  January  i, 
1868.  Banks  willing  to  accept  this  offer  were  relieved  from 
the  requirement  to  invest  ten  per  cent,  of  their  capital  in 
debentures  and  allowed  to  exchange  them  at  par  for  Provin- 
cial notes.  The  Bank  of  Montreal  was  the  only  institution 
which  accepted  the  new  system  and  gradually  substituted ' 
Provincial  notes  for  its  own  issue.  This  action  separated 
the  interests  of  the  Bank  of  Montreal  from  those  of  the 
other  banks  and  led  the  former  to  force  the  legal  tender 
notes  into  circulation  as  rapidly  as  possible  in  the  settlement 
of  its  balances.  The  Bank  of  Montreal  was  able  to  force 
the  other  banks  into  holding  legal  tenders  by  threatening 
to  exact  settlements  in  legal  money,  which  the  other  banks 


396          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

were  thus  compelled  to  set  aside  for  the  purpose.  The  result 
was  a  reduction  of  the  banking  resources  of  the  other  banks 
and  the  complication  of  the  paper  currency  by  the  rival  cir- 
culation of  the  Provincial  notes  in  competition  with  bank- 
notes. 

New  Brunswick  and  Nova  Scotia  were  brought  within  the 
circle  of  Canadian  banking  legislation  by  the  Act  of  1867, 
creating  the  Dominion  of  Canada,  which  conferred  exclusive 
authority  in  matters  connected  with  currency,  coinage,  and 
banking  upon  the  Parliament  of  the  Dominion.  The  charters 
of  existing  banks  were  extended  temporarily  to  the  end  of  the 
first  session  of  Parliament  after  January  i,  1870,  and  several 
provisions  affecting  the  Canadian  banks  were  extended  to 
those  of  New  Brunswick  and  Nova  Scotia.  The  Provincial 
note  issue  was  consolidated  into  an  issue  of  Dominion  notes 
and  redemption  agencies  were  provided  for  in  the  capitals 
of  the  four  provinces.  The  banks  in  existence  when  the 
Confederation  became  a  fact  on  July  i,  1867,  were  eighteen 
in  Ontario  and  Quebec,  five  in  Nova  Scotia,  four  in  New 
Brunswick,  and  one  operating  in  all  the  provinces  under 
royal  charter. 

The  attempts  to  create  a  secured  circulation  or  a  gov- 
ernment currency  were  renewed  after  the  creation  of  the 
Dominion,  and  the  supporters  of  the  former  had  the  benefit 
of  the  example  of  the  United  States  and  the  active  efforts  of 
Mr.  E.  H.  King,  the  manager  of  the  Bank  of  Montreal.  A 
scheme  of  this  sort  was  taken  up  by  Mr.  Rose,  the  new 
Minister  of  Finance,  in  1869,  and,  according  to  his  bill,  was 
to  go  into  effect  on  July  i,  1871.  The  banks  after  that  date 
were  to  be  required  to  reduce  their  unsecured  circulation 
twenty  per  cent,  a  year  until  the  whole  should  be  retired,  and 
were  permitted  to  issue  notes  up  to  the  amount  of  their  capi- 
tal stock  actually  paid  in,  bearing  on  their  face  the  statement 
that  they  were  secured  by  the  deposit  of  Dominion  securi- 
ties. These  notes  were  to  be  legal  tender  throughout  the 
Dominion,  except  at  the  office  of  the  issuing  bank,  so  long 
as  they  were  redeemed  in  specie,  and  were  to  be  protected  by 
a  cash  reserve  amounting  to  twenty  per  cent,  of  the  notes 


THE   CANADIAN  BANKING  SYSTEM.  397 

and  one-seventh  of  the  deposits  subject  to  call.  The  notes 
were  to  constitute  the  first  charge  upon  the  assets  in  case  of 
insolvency.  The  opposition  was  so  strong,  and  there  were 
so  many  measures  whose  success  was  more  important  to  the 
ministry,  that  Mr.  Rose  announced  on  June  i5th  the  tem- 
porary withdrawal  of  the  plan  for  the  session.  Sir  Francis 
Hincks  became  Minister  of  Finance  before  the  next  session 
and  he  abandoned  the  policy  of  a  specially  secured  circula- 
tion and  contented  himself  with  throwing  some  additional 
safeguards  around  the  existing  bank-note  system. 

The  charters  of  the  banks  were  extended  by  the  Act  of 
May  12,  1870,  for  a  period  often  3^ears,  and  the  most  impor- 
tant changes  of  the  period  were  then  made.  The  desire  for 
a  codification  of  the  banking  law  led,  however,  to  a  more  com- 
prehensive act  in  1 87 1,1  which  embodied  the  reforms  of  1870 
with  some  minor  changes  and  many  amplifications  of  detail. 
The  banks  in  1870  surrendered  the  right  to  issue  notes  below 
the  denomination  of  $4  and  secured  in  compensation  the 
abolition  of  the  one  per  cent,  tax  and  the  repeal  of  the  re- 
quirement to  keep  one-tenth  of  their  capital  in  Dominion 
securities.  The  government  assumed  the  issue  of  small 
notes  and  the  banks  were  required  to  hold  not  less  than  one- 
third  of  their  cash  reserves  in  Dominion  notes.  The  severe 
period  of  depression  through  which  the  Dominion  passed 
between  1874  and  1879,  and  the  several  bank  failures  which 
occurred,  led  to  further  important  changes  in  the  banking 
law  when  the  charters  were  about  to  expire  in  1880.  The 
bankers  themselves  came  forward  with  the  proposals  for 
reform  and  were  now  willing  to  accept  several  propositions 
which  they  had  before  rejected.  The  minimum  denomina- 
tion of  notes  was  changed  to  $5  and  the  banks  were  required 
to  retire  the  notes  for  $4  as  soon  as  practicable.  The  pro- 
portion of  cash  reserve  to  be  held  in  Dominion  notes  was 
increased  to  forty  per  cent.  The  use  of  the  title  of  "  Bank  " 
by  a  private  firm  not  incorporated  under  the  laws  of  the 
Dominion  was  made  a  misdemeanor,  unless  the  words  ' '  Not 

1  Act  "of  April  14,  1871,  "relating  to  banks  and  banking,"  34  Vic- 
toria, c.  5. 


398          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

Incorporated  "  were  added  to  the  title.  This  provision  was 
made  to  preve^fee  public  from  mistaking  private  bankers 
for  those  holding^ferters  and  was  extended  in  1890  so  that 
an}'  such  expression  as  "  Bank"  or  "  Banking  House"  was 
made  illegal,  whether  the  words  ' '  Not  Incorporated ' '  were 
added  or  not. 

The  history  of  the  Canadian  banking  system  between  1880 
and  the  renewal  of  the  bank  charters  in  1890  was  a  compara- 
tively uneventful  one,  but  experience  of  the  banking  law  had 
suggested  a  number  of  reforms  which  were  carefully  dis- 
cussed before  the  renewal  was  voted.  It  was  found  that  the 
notes  of  the  banks  did  not  remain  steadily  at  par  in  those 
parts  of  the  country  far  removed  from  the  redemption 
agencies.  It  was  also  found  that,  notwithstanding  the 
ample  security  for  the  final  payment  of  the  notes  of  failed 
banks,  they  sometimes  dropped  to  a  discount  when  the 
holders  desired  to  realize  upon  them  at  once.1  The  impor- 
tance of  concerted  action  to  secure  the  reforms  desired  by 
the  public,  without  infringing  upon  the  freedom  of  banking, 
was  keenly  felt  by  the  leading  banks  and  they  held  a  meeting 
in  Montreal  on  January  u,  1890,  at  which  they  resolved  to 
request  an  interview  with  Mr.  Foster,  the  Minister  of  Fi- 
nance. The  request  was  granted  and  interviews  took  place 
on  January  25th  and  February  nth  and  i2th.  Several  dif- 
ferences of  opinion  developed  regarding  details,  some  of 
which  were  carried  before  the  Privy  Council,  but  a  thorough 
revision  of  the  banking  law  was  enacted  and  received  the 
royal  assent  on  May  16,  1890."  The  important  features  of 
the  Canadian  banking  system,  as  it  developed  from  the  legis- 

"  Although  the  liquidators  were  ready  to  redeem  within  a  month, 
the  discount  on  the  notes  of  the  Exchange  Bank  after  its  failure  rose 
as  high  as  five  or  ten  per  cent.  Redemption  of  the  notes  of  the 
Maritime  Bank,  though  finally  in  full,  was  delayed  for  nearly  three 
years  after  the  failure,  and  in  the  meanwhile  its  issues  sold  for  as  low 
as  forty  cents  on  the  dollar.  In  notes  of  the  Central  Bank  of  Canada, 
Americans  near  Sault  Ste.  Marie  found  a  profitable  speculation  by 
buying  them  up  after  the  failure,  at  ten  per  cent,  discount."— Breck- 
enridge,  315. 

2  53  Victoria,  c.  31,  "  An  Act  respecting  banks  and  banking." 


THE   CA  NA  DIA  N  BA  %KING  S  YS  TEM.  3  99 

lation  of  1870  and  1880  into  that  of  1890,  may  be  discussed 
under  the  following  headings  : 

1.  Security  of  note  issues. 

2.  Elasticity  of  circulation. 

3.  Uniformity  of  circulation,  without  discount  upon  the 
notes. 

4.  Inspection  of  accounts  and  security  of  general  creditors. 

5.  Cash  reserves  and  the  use  of  coin. 

6.  Branch  banks  and  the  requirement  of  large  capital. 

I.  The  essential  conditions  which  secure  the  note  issues 
of  the  Canadian  banks  are  the  duplicate  liability  of  share- 
holders, the  first  lien  of  note-holders  upon  the  assets  of  a 
failed  bank,  the  Bank  Circulation  Redemption  Fund,  and 
the  six  per  cent,  interest  which  accrues  upon  the  notes  of 
failed  banks  from  the  date  of  refusal  to  redeem  to  the  date 
when  readiness  to  redeem  is  again  announced.  The  dupli- 
cate liability  of  shareholders  dates  back  to  1834  in  Ontario 
and  1841  in  Quebec.  The  making  of  the  notes  a  first  lien 
on  the  assets  was  suggested  by  the  bankers  in  1869,  but  was 
abandoned  because  of  the  opposition  of  Mr.  Hincks.  He 
feared  that  the  impairment  of  the  equal  claims  of  other 
creditors  which  this  provision  involved  would  lead  to  a  run 
by  depositors  and  to  the  injury  of  the  banks.  The  failures 
between  1874  and  1879  compelled  many  note-holders  to 
realize  on  their  notes  at  a  great  discount,  in  order  to  obtain 
immediate  use  of  their  money,1  and  dissatisfaction  was  so 
great  that  the  bankers  again  proposed  in  1880  that  the  notes 
be  made  a  first  lien.  The  total  assets  of  each  bank  were 
from  six  to  ten  times  its  note  obligations  and,  if  these  assets 
were  lost,  the  duplicate  liability  of  the  shareholders  would 
still  cover  the  outstanding  notes.  These  resources  consti- 
tuted a  security  for  the  redemption  of  the  notes  which  it 
was  believed  would  prove  complete,  and  which  the  bankers 
were  willing  to  concede  to  the  public  for  the  privilege  of 
retaining  unimpaired  their  power  of  note  issue. 

The  Act  of  1890  confirmed  the  provisions  of  1880  for 
making  the  notes  a  first  lien  on  the  assets,  and  added  two 
1  Breckenridge,  289.  Canadian  bank-notes  arc  not  legal  tender. 


400          HISTOR  Y  OF  MODERN  BANKS  OF  ISSUE. 

new  provisions  designed  to  keep  the  notes  of  a  failed  bank 
absolutely  at  par  during  the  period  of  liquidation.  The 
most  important  of  these  was  the  creation  of  a  safety  fund,  to 
be  called  "The  Bank  Circulation  Redemption  Fund,"  which 
was  to  be  raised  by  contributions  from  the  banks,  before  July 
16,  1892,  to  an  amount  equal  to  five  per  cent,  of  the  average 
circulation  of  each  contributing  bank.  The  redemption  fund 
is  in  the  custody  of  the  Minister  of  Finance  and  bears  interest 
at  the  rate  of  three  per  cent,  per  annum.  It  is  specifically 
set  apart  for  the  payment  of  the  notes  of  failed  banks. 
Redemptions  are  required  to  be  made  without  regard  to  the 
amount  which  the  failed  bank  may  have  paid  into  the  re- 
demption fund,  but  when  the  redemptions,  with  interest, 
exceed  such  payments,  the  Minister  of  Finance  may  call 
upon  the  other  banks  to  make  good  to  the  fund  the  amount 
of  such  excess.  These  calls  upon  the  other  banks  are  limited 
to  one  per  cent,  annually  of  the  amount  of  their  circulation 
and  the  amounts  thus  paid  by  the  banks  are  reimbursed  to 
them  when  recovered  from  the  failed  bank.1 

The  redemption  fund  afforded  a  guarantee,  if  it  was 
needed,  that  the  notes  of  a  failed  bank  would  always  be 
paid  in  full.  A  further  provision  was  made  that  the  notes 
of  failed  banks  should  bear  interest  at  the  rate  of  six  per 
cent,  per  year  from  the  day  of  suspension  to  the  date  named 
for  their  payment.  The  practical  operation  of  this  provision 
has  been  eminently  successful  and  has,  in  connection  with 
the  guarantee  afforded  by  the  safety  fund,  made  the  notes 
of  a  failed  bank  as  valuable  an  investment  up  to  the  time 
of  redemption  as  a  six  per  cent.  bond.  The  holders  of  such 
notes  have  had  no  difficulty  in  selling  them  at  par  to  the 
other  chartered  banks,  to  brokers  or  to  persons  having  a  little 


1  The  omission  of  a  limitation  of  this  sort  upon  the  liability  of  the 
banks  for  the  general  safety  fund  was  one  of  the  causes  of  hostility  to 
the  banking  plan  of  Secretary  Carlisle,  presented  to  the  United  States 
Congress  in  his  annual  report  for  1894.  It  was  admitted  by  those 
familiar  with  the  facts  that  the  resulting  calls  were  not  likely  to  be 
large  in  fact,  but  it  was  feared  that  the  indefinite  character  of  the 
liability  would  excite  alarm  among  depositors. 


THE   CANADIAN  BANKING  SYSTEM.  401 

money  seeking  temporary  investment.  The  legal  money 
of  redemption  under  Canadian  law  is  "specie,"  and  the 
gold  standard  is  maintained  with  but  little  gold  in  circula- 
tion. The  banks,  in  making  ordinary  payments,  were  re- 
quired by  the  law  of  1880  to  pay  amounts  up  to  $50,  upon 
request  of  the  payee,  in  Dominion  notes.  This  limit  was 
raised  in  the  Act  of  1890  to  $100. 

2.  One  of  the  important  benefits  inherent  in  the  Cana- 
dian bank-note  circulation  is  its  elasticity.  This  is  not  due 
affirmatively  to  recent  legislation,  but  is  due  to  the  success- 
ful resistance  of  Canadian  bankers  to  government  proposi- 
tions for  a  specially  secured  currency.1  The  banks  pay  out 
the  notes  when  business  activity  demands  them  and  the 
notes  drift  back  for  deposit  and  the  settlement  of  discounts 
when  business  activity  slackens.  The  circulation  thus  varies 
nearly  fifteen  per  cent,  in  the  course  of  a  year.  The  mini- 
mum circulation  of  the  year  has  ranged  during  the  past  thir- 
teen years  from  $28,063,000  in  1884  to  $31,927,000  in  1893, 
while  the  maximum  circulation"  of  the  year  has  ranged  from 
$33,998,000  in  1884  to  $38,688,000  in  1892.  The  month  of 
October  has  been,  with  one  exception  during  the  past  thir- 
teen years,  the  month  of  maximum  circulation.  The  mini- 
mum has  been  reached  in  some  cases  in  April,  and  in  others 
not  until  July  or  August,  but  the  larger  part  of  the  reduc- 
tion occurs  during  the  spring  and  promptly  upon  the  con- 
traction of  the  demand  for  money.  The  following  table, 
showing  the  maximum  and  minimum  circulation,  with  the 
month  in  which  it  has  occurred,  for  the  past  seven  years, 
affords  an  illustration  of  the  fluctuations  : 


1  Even  in  1890  the  theory  of  a  circulation  based  upon  evidences  of 
the  public  debt  had  considerable  footing  and  was  advocated  by  Sir 
Donald  Smith,  President  of  the  Bank  of  Montreal.  It  seemed  to  be 
thought  in  Canada  that  such  a  system  would  benefit  the  larger  banks 
at  the  expense  of  the  weaker  and  some  of  the  opposition  to  the  crea- 
tion of  a  safety  fund  was  apparently  based  upon  the  fact  that  it  would 
invest  the  notes  of  the  weakest  banks  with  the  same  credit  as  those 
of  the  strongest. — Breckenridge,  320.  This  argument  was  necessarily 

directed  against  convenience  and  uniformity. 
26 


402 


HISTORY  OF  MODERN  BANKS  OF  ISSUE. 


YEAR. 

LOWEST  POINT. 

HIGHEST  POINT. 

MONTH. 

AMOUNT. 

MONTH. 

AMOUNT. 

1888 

May 

$29,278,000 

October 

$36,244,000 

I88g 

May 

30,012,000 

October 

35,233,000 

iSgO 

April 

30,672,000 

October 

36,480,000 

iSgl 

July 

3O,58O,OOO 

November 

37,431,000 

1892 

May 

31,383,000 

October 

38,688,000 

1893 

May 

31,927,000 

October 

36,906,000 

1894 

May 

28,467,000 

October 

34,516,000 

The  banking  experience  of  Canada  in  recent  years  is  a 
sufficient  vindication  against  the  charge  that  a  banking  cur- 
rency leads  to  inflation.  The  volume  of  notes  usually  in 
circulation  exceeds  by  only  a  small  fraction  fifty  per  cent,  of 
the  aggregate  capital  stock  of  the  banks,  although  they  are 
allowed  to  issue  to  the  full  amount  of  their  capital.  Some 
of  the  banks  have  occasionally  touched  the  maximum  limit 
and  the  branches  have  been  promptly  notified  by  telegraph 
when  the  limit  has  been  reached.  A  real  demand  for  money 
from  such  banks  is  met  by  loans  to  them  from  banks  which 
have  not  reached  the  limit.  The  contracts  for  these  loans 
call  for  money,  like  other  contracts,  but  it  is  understood  that 
they  shall  be  paid  in  the  notes  of  the  lending  banks,  so  that 
the  public  get  the  benefit  of  the  limit  upon  their  combined 
issues  and  the  two  banks  divide  the  profits  on  the  circula- 
tion thus  put  in  circulation.1  The  paid-up  capital  of  the 
Canadian  banks  on  January  i,  1896,  was  $62,196,391,  and 
the  notes  outstanding  were  $32,565,179,  so  that  there  was  a 
margin  of  issues  unavailed  of  to  the  amount  of  nearly 
$30,000,000. 

3.  The  necessity  of  providing  more  fully  for  maintain- 
ing the  notes  of  all  the  banks  at  par  in  all  parts  of  the  Do- 
minion, which  was  recognized  in  1890,  was  due  not  so 
much  to  any  question  of  the  solvency  of  the  banks  as  to  the 
mechanical  provisions  for  redemption.  The  convenience  of 
note-holders  had  already  been  partially  provided  for  by  mu- 

1  Root,  Canadian  Bank-Note  Currency,  "Sound  Currency, ':  II., 
No.  2,  p.  7. 


THE    CANADIAN  BANKh\G  SYSTEM.  403 

tual  arrangements  between  the  banks  for  the  redemption 
of  each  other's  notes.  It  would  have  involved  a  manifest 
injustice,  in  view  of  the  wide  difference  in  character  and 
strength  of  the  Canadian  banks  to  compel  each  to  redeem 
the  notes  of  all  others  against  its  will,  but  the  banks  were 
ready  to  accept  a  mandatory  law  requiring  each  bank  to 
establish  agencies  for  the  redemption  of  its  own  notes  at  the 
commercial  centre  of  each  province.  It  was  accordingly 
provided  in  the  Act  of  1890  (Section  55)  : 

The  bank  shall  make  such  arrangements  as  are  necessary  to  ensure 
the  circulation  at  par  in  any  and  every  part  of  Canada,  of  all  notes 
issued  or  reissued  by  it  and  intended  for  circulation  ;  and  ttfwards 
this  purpose  the  bank  shall  establish  agencies  for  the  redemption  and 
payment  of  its  notes  at  the  cities  of  Halifax,  St.  John,  Charlottetown, 
Montreal,  Toronto,  Winnipeg,  and  Victoria,  and  at  such  other  places 
as  are,  from  time  to  time,  designated  by  the  Treasury  Board. 

4.  The  bank-note  circulation  of  Canada,  under  the  oper- 
ation of  the  redemption  fund  and  the  complementary  re- 
quirements, has,  in  the  language  of  Mr.  Breckenridge, 
"  acquired  a  thoroughly  national  character;  since  1890  it 
has  circulated  from  one  end  of  the  country  to  the  other, 
never  causing  loss  to  the  holder,  yet  keeping  unimpaired  the 
qualities  for  which,  in  its  less  perfect  state,  Canadians  had 
again  and  again  refused  to  give  it  up."1  The  fulfilment  of 
these  conditions,  with  the  elasticity  and  sufficiency  which 
usually  accompany  a  banking  currency,  meet  all  the  require- 
ments of  a  perfect  currency  system.  The  protection  of 
the  note-holder  against  both  temporary  and  permanent  loss 
closes  the  case  in  favor  of  Canadian  banks  of  issue.  They 
may  be  well  or  ill  managed  as  banks  of  discount  and  deposit, 
but,  as  such  banks  must  exist  under  any  currency  system, 
their  bad  management  cannot  be  made  an  argument  against 
the  power  of  note  issue  unless  that  power  increases  their  power 
for  evil  as  banks  of  discount  and  deposit.  Questions,  there- 
fore, relating  to  the  management  of  the  Canadian  banks  in 
their  discounting  business,  and  the  number  of  failures  they 
may  have  suffered,  should  not  be  confused  with  the  question 

1  The  Canadian  Banking  System,  338. 


404          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

of  the  success  of  their  system  of  note  issues  in  providing  a 
sufficient,  elastic,  and  secure  currency. 

Having  made  this  distinction,  it  may  be  admitted  that  the 
Canadian  banking  system  is  capable  of  improvement  in  the 
direction  of  official  supervision.  While  discount  banking  is 
essentially  a  private  business,  it  is  usually  done  by  corpora- 
tions holding  special  privileges  by  authority  of  the  state, 
and  the  subdivision  of  modern  industries  justifies  the  citizen 
in  asking  that  the  state  exercise  the  power  of  visitation  and 
supervision  over  such  corporations,  when  they  deal  inti- 
mately with  the  public,  which  he  cannot  conveniently  ex- 
ercise for  himself.  The  weakest  spot  in  the  Scotch  and 
Canadian  banking  systems  has  been  the  absence  of  this  su- 
pervision, and,  defective  as  government  supervision  often  is, 
it  would  probably  have  prevented  some  of  the  great  losses 
which  have  come  to  shareholders  in  those  countries.  The 
proposal  of  government  supervision  in  Canada  has  been  sev- 
eral times  brought  before  Parliament,  but  has  always  been 
resisted  upon  the  grounds  that  public  auditors  or  inspectors 
could  not  ascertain  accurately  the  real  character  of  banking 
assets,  and  that  the  fact  of  government  inspection  would 
mislead  the  public  into  a  confidence  which  might  prove  to  be 
misplaced.  The  project  of  inspection  was  renewed  by  Mr. 
Foster  in  1890,  but  the  auditors  whom  he  proposed  were  to 
be  appointed  by  the  shareholders  at  their  annual  meeting. 
The  same  objections  w^hich  had  been  made  on  previous  occa- 
sions were  renewed  and  the  project  of  a  formal  audit  was 
again  abandoned. 

The  larger  Canadian  banks  are  not,  however,  without  a 
system  of  supervision  of  their  own,  which  ought  to  be  more 
efficient  than  that  of  government  officers  when  there  is  no 
collusion  between  the  inspector  and  general  manager.  Such 
collusion  is  not  likely  to  be  a  frequent  occurrence,  because 
the  chief  inspector  is  required  by  his  duties  to  be  a  man  of 
independent  judgment,  of  banking  experience  and  reputa- 
tion, and  to  receive  a  large  salary.  It  is  his  duty  to  make 
tours  of  the .  branches,  annually  or  oftener,  for  the  purpose 
of  examining  the  character  of  the  discounts  granted  and  the 


THE    CANADIAN  BANKING  SYSTEM.  405 

general  policy  pursued.  The  mere  verification  of  accounts 
is  performed  by  subordinates.  The  chief  inspector,  there- 
fore, is  the  equal  in  character  and  position  of  the  general 
manager,  and  is  exposed  to  few  of  the  temptations  of  an 
inferior.  He  confers  with  the  latter  and  reports  the  results 
of  his  inquiries  regarding  the  standing  of  firms  seeking  dis- 
counts. If  the  inspector  is  associated  too  closely  by  family 
or  other  ties  with  the  general  manager,  the  fact  is  likely  to 
become  a  subject  of  business  gossip  and  to  impair  confidence 
in  the  bank.  The  establishment  of  the  general  redemption 
fund  has  had  a  salutary  effect  in  attracting  the  attention  of 
the  banks  to  each  other's  condition,  because  of  the  common 
responsibility  which  the  fund  imposes. 

The  safeguards  of  the  Canadian  system  have  been  such 
that  the  entire  losses  to  creditors,  exclusive  of  shareholders, 
since  confederation  in  1867,  have  been  less  than  $2,000,000, 
representing  an  average  of  about  $72,000  annually,  or  $i  in 
$3000  of  the  present  average  liabilities.  "The  record  for 
the  years  preceding  1867,"  says  Mr.  Breckenridge,  "is 
hardly  less  admirable,  there  being  no  failures  in  Nova  Scotia 
or  L,ower  Canada,  while  in  New  Brunswick  the  double  lia- 
bility of  shareholders  saved  the  banks'  creditors,  and  in  Up- 
per Canada  the  failure  of  the  Bank  of  Upper  Canada  was  the 
only  one  which  inflicted  considerable  loss."  1  The  Bank  of 
Upper  Canada  violated  the  rules  of  sound  banking  under  the 
stimulus  of  a  period  of  rapid  growth  in  Ontario,  and  made 
heavy  loans  to  lawyers,  politicians,  and  the  gentry.  Much 
money  was  lost  in  the  land  speculations  of  1857,  tne  capital 
was  reduced  in  1861,  the  public  deposits  were  reduced  in 
1863,  another  reduction  of  capital  in  1866  failed  to  save  the 
bank,  and  payment  was  stopped  September  18,  1866,  with 
liabilities  of  $3,402,000.  The  assets  were  nominally  worth 
$5,362,000,  but  gradually  shrunk  until  in  1882  they  were  only 
$420,387  against  still  outstanding  liabilities  of  $1,380,015. 
Of  this  liability  $1,122,649  was  still  due  the  government, 
which  was  open  to  the  suspicion  by  its  tardy  efforts  to  re- 


1  The  Canadian  Banking  System,  355 


406          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

cover  that  it  had  abused  its  power  to  obtain  advances  from 
the  bank  during  its  period  of  prosperity. * 

Six  failures  occurred  in  Canada  between  1871  and  1881, 
six  between  1883  and  1889,  and  two  after  the  latter  date. 
The  notes  in  every  case  since  1881  have  been  paid  in  full, 
but  in  some  cases  prior  to  1890  they  were  redeemed  after 
considerable  delay  and  after  they  had  fallen  to  a  discount. 
The  capital  of  only  one  of  the  failed  banks  was  larger  than 
$500,000.  This  one  was  the  Federal  Bank  of  Canada,  which 
increased  its  capital  in  1883  to  $3,000,000,  but  was  compelled 
to  reduce  it  in  1885  to  $1,250,000  on  account  of  losses  from 
Michigan  lumber  transactions  and  loans  in  Manitoba.  There 
was  no  panic  in  the  case  of  any  of  these  failures,  and  the 
other  banks  having  offices  in  Toronto  came  to  the  assistance 
of  the  Federal  Bank  in  January,  1888,  and  agreed  to  advance 
enough  money  to  pay  off  its  entire  liabilities  and  assume  the 
assets,  if  the  bank  would  wind  up  its  affairs.  The  sharehold- 
ers in  Canadian  banks  lost  between  July,  1867,  and  the  close 
of  the  year  1889  $23,000,000  in  capital,  accumulated  reserves, 
and  assessments  resulting  from  duplicate  liability. 

The  two  failures  since  1890  have  been  those  of  the  Com- 
mercial Bank  of  Manitoba  and  the  Banque  du  Peuple  of 
Montreal.  The  Commercial  Bank  succeeded  to  the  business 
of  a  private  firm  at  Winnipeg  in  1884  and  assumed  the  heavy 
risks  which  are  often  run  by  banks  in  new  countries.  Its 
business  was  essentially  local  and  its  failure  was  not  a  sur- 
prise to  other  bankers  in  the  Dominion.  The  other  banks 
were  critical  as  early  as  1892  about  accepting  the  drafts  of 
the  Commercial  Bank  on  Montreal,  and  in  May,  1893,  a 
drain  of  deposits  began.  The  bank  paid  out  its  notes  for 
a  time  to  nervous  depositors  and  thus  increased  its  circula- 
tion between  May  3ist  and  July  3d  by  the  sum  of  $140,605, 
while  the  deposits  were  reduced  $189, 813. a  The  automatic 

1  Breckenridge,  175. 

2  The  purpose  of  depositors  in  accepting  their  deposits  in  notes 
was  to  convert  an  ordinary  claim  into  a  preferred  claim,  but  the  pro- 
cess of  conversion  was  necessarily  limited  by  the  limit  of  circulation 
allowed  the  bank,  as  .well  as  by  the  certainty  that  the  bank  would 
quickly  be  unable  to  settle  its  balances  with  the  other  banks. 


THE   CANADIAN  BANKING  SYSTEM.  407 

operation  of  the  Canadian  system  of  redemption  came  into 
play  when  these  notes  fell  into  the  hands  of  other  banks, 
and  the  Commercial  Bank  was  compelled  to  suspend  with 
liabilities  of  $1,344,269.  The  Banque  du  Peuple  was  com- 
pelled to  reduce  its  capital  in  1885  from  $1,500,000  to 
$1,200,000,  and  suspended  on  July  16,  1895,  with  a  circula- 
tion of  about  $787,000  and  with  total  liabilities  of  about 
$7,500,000. 

The  Banque  du  Peuple  closed  its  doors  in  the  hope  that 
arrangements  might  be  concluded  with  its  creditors  which 
would  enable  it  to  resume  business  within  the  period  of 
ninety  days,  for  which  continued  suspension  would,  under 
the  law,  "constitute  the  bank  insolvent  and  operate  a  for- 
feiture of  its  charter  or  act  of  incorporation,  so  far  as  regards 
all  further  banking  operations."  The  notes  remained 
steadily  at  par  and  were  redeemed  before  October  5th,  ex- 
cept $150,000,  for  which  the  money  was  held  in  the  bank. 
One  of  the  plans  proposed  for  reorganization  was  the  issue 
of  deposit  receipts  to  depositors,  payable  in  from  six  months 
to  two  years.  The  period  of  suspension  passed,  however, 
without  resumption,  and  it  appeared  at  the  meeting  of  the 
shareholders  on  December  17,  1895,  that  overdrafts  had  been 
granted  to  five  individuals  and  firms  amounting  to  $1,229,000, 
and  to  four  of  the  directors  to  the  amount  of  $235,000.  The 
cashier  was  among  those  to  whom  large  overdrafts  had  been 
granted,  and  it  was  reported  that  he  had  allowed  the  audit- 
ors only  twenty  hours  to  examine  transactions  aggregating 
$26,000,000  and  had  misled  both  auditors  and  directors.2 

5.  The  requirement  of  a  fixed  minimum  reserve  of  specie 
against  liabilities  was  suggested  by  Mr.  Hincks  in  1869,  but 
he  was  convinced  by  the  unanimous  opposition  of  the  bankers 
that  the  requirement  would  prove  more  of  an  injury  than  a 
benefit  to  the  business  community  in  times  of  stringency. 
It  was  pointed  out  that  a  reserve  which  cannot  be  used  is  of 
no  avail  in  emergencies  ;  that  if  the  proportion  were  low,  it 

1  Sec.  91. 

2  New    York  Evening  Post,   Dec.  18,  1895,  special  despatch  from 
Montreal. 


408          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

would  be  treated  by  weak  banks  as  always  sufficient ;  and 
that  a  part  of  a  bank's  best  and  most  available  funds  often 
consisted  of  balances  in  New  York  and  London,  rather  than 
specie  in  its  own  vaults.  These  arguments  were  conclusive 
with  Mr.  Hincks,  but  they  failed  to  convince  Mr.  Foster 
when  the  plan  of  a  minimum  reserve  was  suggested  to  him 
in  1890.  The  experiment  of  a  minimum  reserve  had  then 
been  longer  in  operation  in  the  United  States  and  was 
believed  to  have  produced  beneficial  results.  It  was  pointed 
out,  however,  that  the  small  local  banks  of  the  United  States 
occupied  a  very  different  position  from  the  great  chartered 
banks  of  Canada  and  that  regulations  which  might  be 
necessary  in  the  one  case  might  not  be  in  the  other.  Mr. 
Foster's  proposition  was  to  require  each  bank  to  hold  specie 
and  Dominion  notes  to  the  amount  of  ten  per  cent,  of  its 
liabilities.  The  bankers  carried  the  contest  before  the  Privy 
Council  and  at  a  hearing  given  them  on  February  22,  1890, 
carried  the  majority  with  them  and  secured  the  exclusion  of 
any  provision  for  the  reserve  from  the  government  bill.1 

One  of  the  strongest  arguments  in  favor  of  liquid  reserves 
and  banking  upon  general  assets,  without  government  inter- 
ference, is  found  in  the  comparative  calm  which  has  reigned 
among  Scottish  and  Canadian  bankers  when  those  of  other 
countries  have  been  shaken  by  panic.  The  last  test  of  this 
kind  came  in  1893,  when  Canada  could  not  fail  to  be  affected 
by  the  acute  financial  convulsion  of  her  great  neighbors, 
the  United  States.  Four  of  the  Canadian  banks  have  their 
own  offices  in  New  York  and  the  others  have  agents  there 
as  well  as  in  London.  These  agencies  do  not  seek  business 
actively  in  New  York  and  London,  but  buy  and  sell  bills  of 
exchange  when  they  can  do  so  to  better  advantage  than  the 
parent  bank.  They  loan  more  or  less  on  call,  but  only  rarely 
on  time.  In  periods  of  stringency  they  have  several  times 
come  to  the  rescue  of  the  New  York  money  market,  when 
the  requirements  of  a  rigid  reserve  law  tied  the  hands  of  the 
American  banks.  Their  most  important  service  has  been, 
however,  to  their  parent  banks  when  the  pressure  of  an 

1  Breckenridge,  327. 


THE   CANADIAN  BANKING   SYSTEM.  409 

unusual  demand  has  led  the  latter  to  draw  upon  their  foreign 
balances.  These  balances  in  New  York  constituted  one  of 
the  best  liquid  assets  of  the  Canadian  banks  in  1893  and 
were  drawn  down  nearly  $8, 000,000.  The  banks  sacrificed 
temporary  high  profits,  raised  their  interest  rates  no  higher 
than  seven  per  cent. ,  protected  their  regular  customers,  and 
while  their  neighbors  across  the  border  were  foundering  in 
the  waves  of  a  financial-  crisis,  they  rode  the  storm  with  a 
serenity  which  might  have  justified  for  them  the  heroic 
motto  of  William  the  Silent,  Stzvis  tranquillus  in  undis.1 

6.  Two  of  the  important  features  of  the  Canadian,  as 
well  as  of  the  Scotch  banking  system,  are  the  large  capital 
required  by  the  banks  and  their  system  of  branches.  While 
each  feature  is  capable  of  separate  discussion,  they  are  more 
or  less  connected  with  each  other,  from  the  fact  that  the 
requirement  of  a  large  capital  limits  the  number  of  the 
banks  and  makes  the  establishment  of  branches  necessary 
to  afford  banking  facilities  to  the  country.  The  minimum 
paid-up  capital  required  in  Canada  prior  to  the  revision  of 
1890  was  only  $100,000,  and  several  small  banks  of  a  local 
character  had  failed  and  caused  losses  to  the  depositors  as 
well  as  the  shareholders.  The  law  of  1890  required  sub- 
scriptions to  the  capital  stock  of  each  new  bank  to  an  amount 
not  less  than  $500,000  and  actual  payments  to  the  amount 
of  $250,000.  No  new  bank  is  permitted  to  begin  business 
or  to  issue  notes  until  the  Treasury  Board  is  satisfied  that 
this  capital  has  been  actually  paid  up,  and  only  two  banks 
are  now  in  existence  chartered  since  1883.  The  paid-up 
capital  of  the  thirty-eight  Canadian  banks  on  December  31, 
1895,  was  $62,196,391,  of  which  $52,608,489  was  in  Ontario 
and  Quebec.  This  affords  an  average  about  nine  times  as 
large  as  that  of  the  3715  national  banks  of  the  United  States, 
which  reported  a  capital  on  November  i,  1895,  °f  $664,136,- 
915.  The  Bank  of  Montreal  now  has  a  paid-up  capital  of 
$12,000,000 ;  the  Merchant's  Bank  of  Canada,  situated  at 
Montreal,  and  the  Canadian  Bank  of  Commerce  at  Toronto 
have  a  capital  of  $6,000,000  each  ;  the  Bank  of  British  North 

1  Breckeiiridge,  451. 


410  HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

America  has  a  capital  of  $4,866,666  ;  the  Bank  of  British 
Columbia  has  a  capital  of  $2,920,000  ;  the  Quebec  Bank  has 
a  capital  of  $2,500,000;  Molson's  Bank  of  Montreal  has  a 
capital  of  $2,000,000 ;  and  the  Imperial  Bank  of  Canada  at 
Toronto  has  a  capital  of  $1,963,600.  The  smaller  banks 
are  in  Nova  Scotia  and  New  Brunswick  or  among  the  French 
banks  of  Quebec  which  received  charters  at  an  early  date. 
The  smallest  paid-up  capital  is  that  of  the  Summer  Side 
Bank  of  Prince  Edward  Island,  which  is  $48,666.  The 
thirty -eight  Canadian  banks  had  at  the  beginning  of  1896, 
outside  of  city  branches  of  local  banks,  483  establishments 
in  273  localities.  There  were  250  bank  offices  in  Ontario, 
89  in  Quebec,  63  in  Nova  Scotia,  31  in  New  Brunswick,  20 
in  Manitoba,  14  in  British  Columbia,  9  in  the  Northwest 
Territory,  and  7  in  Prince  Edward  Island.1  The  entire 
country  is  thus  served  as  efficiently  in  the  mere  number  of 
establishments  as  the  United  States  with  its  banks  without 
branches. 

It  is  maintained  by  the  friends  of  the  Canadian  system 
that  the  combination  of  large  capitals  and  numerous  branches 
has  many  advantages  beyond  the  mere  supply  of  banking 
facilities.  It  secures  on  the  one  hand  a  unity  of  policy  on 
the  part  of  the  leading  banks  in  times  of  stringency  far  dif- 
ferent from  the  playing  at  cross-purposes  which  distinguished 
the  action  of  the  national  banks  of  the  great  reserve  cities  in 
the  United  States  in  the  panic  of  1893  against  the  smaller 
banks  of  the  interior  and  the  far  West.  The  Canadian  sys- 
tem, on  the  other  hand,  does  not  sacrifice  one  section  to 
another,  but  enables  the  managers  of  the  large  banks  to 
distribute  accommodation  evenly  throughout  their  system, 
to  mass  currency  where  it  is  most  needed,  and  by  means  of 
their  power  of  note  issue  to  equip  every  branch  with  ample 
resources  for  sustaining  commercial  credit  without  weaken- 
ing their  reserves  of  actual  cash.  The  effect  of  the  Canadian 
system  has  been  to  make  the  rate  at  the  most  distant  interior 


1  Letter  of  Mr.  J.   H.    Plummer,  Chairman  editing   committee  of 
Canadian  Bankers'  Association,  January  31,  1896. 


THE   CANADIAN  BANKING  SYSTEM.  411 

branch  not  more  than  one  or  two  per  cent,  higher  than  to 
the  best  borrower  in  Montreal  or  Toronto,  while  in  the 
United  States  rates  range  between  ten  and  twelve  per  cent. 
in  the  newer  sections  of  the  country  while  money  is  a  drug 
in  the  market  in  the  great  reserve  cities.1  The  effect  of  the 
comparative  unity  of  Canadian  banking  without  the  evils  of 
monopoly  which  sometimes  accompany  such  unity,  is  to 
diminish  failures  and  protect  a  bank  against  local  losses  by 
the  profits  in  other  localities.  The  management  at  the  cen- 
tral office  are  able  to  keep  a  sufficiently  close  watch  upon 
every  branch  to  prevent  reckless  banking  and  bad  manage- 
ment, but  they  are  willing  to  conduct  a  branch  in  many 
cases  at  a  rate  of  profit  which  would  not  justify  the  main- 
tenance of  a  separate  bank  or  even  of  a  branch  bank  with- 
out the  power  of  note  issue.  The  Canadian  system,  therefore, 
permits  the  extension  of  banking  facilities  more  efficiently 
than  the  American  system  of  small  independent  banks,  and 
the  power  to  issue  notes  against  general  assets  affords  a 
margin  of  profit  and  a  diminished  expense  for  cash  reserve 
which  would  not  be  afforded  by  a  specially  secured  note 
issue. 

The  leading  items  of  the  accounts  of  the  Canadian  banks 
for  representative  years  have  been  as  follows  : 2 

1  Cornwall,  16. 

2  The  table  gives  only  a  general  view  of  the  progress  of  Canadian 
banking  operations,  without  permitting  absolutely  exact  comparisons, 
because  of  the  changes  in  the  form  of  the  official  reports  which  were 
made  in  1870,  1872,  1880,  and  1890.     The  figures  for  1841  and  1851  are 
reduced  from  pounds  sterling,  in  which  the  accounts  were  then  ex- 
pressed, and  with  those  of  1861  cover  only  the  Dominion  of  Canada, 
without  including  New  Brunswick  and  Nova  Scotia.     The  changes  in 
the  form  of  statement  affect  principally  the  item  of  discounts,  which 
included  substantially  all  loans  in  1867,  but  excluded  certain  advances 
on  securities  and  on  current  accounts  between  that  date  and  1890. 
The  present  form  of  statements  includes    under   "current  loans" 
somewhat  more  than  was  formerly  included.     In  every  case,  however, 
these  loans  on  bills  discounted  make  up  the  bulk  of  the  loan  account. 
The  private  deposits  in  the  banks,  payable  on  demand,  on  December 
31,  1895,  were  $67,452,397  ;  deposits  payable  after  notice  or  on  a  fixed 
day,  1119,667,176. 


412 


HISTORY  OF  MODERN  BANKS  OF  ISSUE. 


DEC.  3iST. 

NO.  BANKS. 

PAID-UP  CAPITAL. 

NOTE  CIRCULATION. 

DISCOUNTS. 

l84I 

9 

$11,380,000 

$   455,ooo 

$  l6,4OO,OOO 

1851 

8 

I4,48O,OOO 

810,000 

27,800,000 

1861 

16 

24,410,796 

11,780,364 

39,588,842 

1867 

28 

32,500,162 

10,102,439 

54,899,142 

1873 

28 

57,931-359 

29,016,659 

119,647,350 

1876 

39 

66,137,315 

23,275,701 

122,562,334 

1880 

36 

59,819,603 

27,328,358 

105,587,672 

1885 

41 

61,763,279 

32,363,992 

125,493,660 

1890 

38 

60,057,235 

35,006,274 

153,236,184 

1891 

38 

61,299,305 

35,634,129 

l86,59O,6O2 

1892 

39 

61,938,515 

36,194,023 

I98,532,l60 

1893 

39 

62,099,243 

34,418,936 

200,397,'498 

1894 

39 

61,683,719 

32,375,620 

195,836,141 

1895 

38 

62,196,39! 

32,565,179 

202,088,259 

CHAPTER  XVII. 

t 

THK    BANKS   OF   LATIN   AMERICA. 

Variety  of  Systems  in  Mexico  and  the  Southern  Countries — The  Ex- 
perience of  Chile,  Brazil,  the  Argentine  Republic,  and  Uruguay, 
with  the  Suspension  of  Specie  Payments — Paraguay  and  the 
Northern  States — Haiti,  Central  America,  and  the  Banks  of  the 
European  Colonies. 

THK  banking  systems  of  the  American  States  and  depen- 
dencies of  the  South  offer  a  great  variety  of  methods 
of  note  issue  and  a  great  variation  in  the  safeguards 
thrown  around  such  issues.  Some  of  the  banking  systems 
of  Latin  America  have  been  the  development  of  time  and 
experience ;  others  have  been  framed  as  an  entirety  upon 
the  model  of  some  European  system,  sometimes  with  the 
approval  of  eminent  foreign  economists  ;  and  others  are  sim- 
ply concessions  by  the  governments  to  English  capitalists 
who  conduct  the  affairs  of  the  banks  from  London.  The 
domestic  systems  of  banking  and  of  currency  have  illus- 
trated in  many  cases  the  fact  that  the  best  regulations  do 
not  always  constitute  a  safeguard  against  unsound  banking 
in  countries  where  internal  development  is  rapid,  specula- 
tion is  intense,  and  the  conservatism  of  fixed  conditions  does 
not  prevail.  Bad  as  have  been  the  results  of  some  of  the 
banking  systems,  however,  their  evils  have  hardly  kept 
pace  with  the  evils  of  government  paper  currency,  which  has 
proved  such  a  fetter  upon  the  prosperity  of  many  South 
American  States.  The  banking  systems  which  have  been 
at  their  worst  have  been  those  which  have  been  only  covert 
branches  of  the  Treasury  or  the  pliant  tools  of  executive 

413 


HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

power.  The  banks  founded  by  English  capital  have  for  the 
most  part  kept  free  from  these  entanglements  and  have  paid 
continuous  dividends  to  their  shareholders.  They  have  not 
escaped  in  some  cases  serious  losses  from  the  depreciation  of 
the  paper  currency  or  the  fall  of  exchange  in  silver-using 
countries,  but  they  have  battled  against  these  evils  with  the 
intelligence  and  caution  which  are  derived  from  a  knowledge 
of  correct  banking  principles.1 

The  Banks  of  Mexico. 

The  present  banking  circulation  of  Mexico  is  principally 
supplied  by  the  National  Bank  of  Mexico,  which  grew  out 
of  the  consolidation  in  1884  of  several  banks  of  issue  then  in 
existence.  Several  banks  were  authorized  to  issue  circulat- 
ing notes  under  special  charters  during  the  early  history  of 
the  republic,  but  only  a  few  survive,  one  of  these  being  an 

1  The  great  English  banks  which  do  business  in  South  America,  as 
well  as  in  Asia,  Africa,  and  the  islands  of  the  sea,  are  one  of  the  po- 
tent instruments  of  British  commercial  supremacy  in  the  world  and 
concentrate  the  business  of  foreign  exchange  in  London.  Sixty  in- 
corporated banks,  nearly  all  of  large  capital,  exist  iu  London,  devoted 
exclusively  to  international  banking.  Their  aggregate  capital  is  com- 
puted at  1294,000,000,  in  addition  to  $  175, 000,000  invested  by  private 
banking  houses,  and  their  deposits  exceed  $1,200,000,000. — Address 
of  Ulysses  D.  Eddy  before  National  Association  of  Manufacturers  at 
Chicago,  New  York  Journal  of  Commerce,  Jan.  24,  1896.  The  Inter- 
national American  Conference,  held  at  Washington  in  1889,  recom- 
mended the  creation  of  an  international  American  bank,  to  promote 
direct  exchange  transactions  with  South  America.  Bills  have  been 
introduced  in  several  successive  Congresses,  proposing  the  incorpora- 
tion of  such  an  institution,  and  one  is  pending  in  the  Fifty-fourth 
Congress,  but  no  effective  action  has  yet  been  taken.  It  was  sug- 
gested by  Secretary  Elaine,  in  his  letter  to  President  Harrison,  trans- 
mitting the  report  of  the  Conference,  in  favor  of  such  a  bank,  that 
the  volume  of  trade  with  the  countries  south  of  the  United  States 
amounted  in  1889  to  $282,005,057,  of  which  $181,058,966  consisted  of 
imports  of  merchandise  into  the  United  States  and  $71,938,181  of  ex- 
ports of  merchandise,  upon  which  a  commission  of  three-quarters  of 
one  per  cent,  would  represent  a  banking  charge  of  about  $1,800,000. 
— Sen.  Ex.  Doc.  129,  Fifty-first  Congress,  ist  Sess.,  2. 


THE  BANKS  OF  LATIN  AMERICA.  415 

English  institution  called  the  Bank  of  London,  Mexico,  and 
South  America.  The  National  Bank  of  Mexico  was  founded 
mainly  with  French  capital,  and  occupies  substantially  the 
position  of  the  Bank  of  Kngland  in  regulating  the  credit  cir- 
culation of  the  country  and  making  advances  to  the  govern- 
ment. The  capital  is  $2o,ooo,ooo,1  of  which  forty  per  cent, 
is  paid  up.  The  bank  agreed  at  the  outset  to  advance  from 
$6,000,000  to  $8,000,000  to  the  government  at  six  per  cent., 
and  to  collect  a  part  of  the  federal  revenues  for  a  small  com- 
mission. The  charter  of  the  bank  runs  for  fifty  years  from 
May  31,  1884.  The  bank  has  the  right  to  issue  notes  to  the 
amount  of  three  times  the  cash  reserve,  which  may  be  held 
in  gold  or  silver  coin  or  bullion.  Their  issue  is  supervised 
by  two  officers  appointed  by  the  government,  who  affix  an 
official  seal,  indicating  that  the  stamp  tax  has  been  paid, 
and  take  note  of  the  cash  reserve,  in  order  to  assure  them- 
selves that  the  law  imposing  a  fixed  proportion  between 
reserve  and  note  issues  is  complied  with. 

The  denominations  of  the  notes  run  from  $i  to  $1000  and 
they  are  required  to  be  redeemed  in  silver  coin  on  demand 
at  the  central  office  of  the  bank  or  at  the  branches  through 
which  they  are  issued.  The  notes  of  the  National  Bank  are 
receivable  for  public  dues  in  cities  where  branches  exist  or 
where  there  are  agents  who  exchange  the  notes  for  coin 
without  discount.2  The  liabilities  of  the  National  Bank  on 
account  of  circulation  on  December  31,  1895,  were  $18,359,- 
346  and  of  the  International  and  Mortgage  Bank  about 
$2,000,000.  The  total  liabilities  of  the  National  Bank  on 
that  date  were  $67,743,288,  of  which  $24,641,661  was  on 
account  of  deposits,  $1,992,281  on  account  of  reserve,  and 
$20,000,000  on  account  of  capital.  The  assets  included 
$12,000,000  in  capital  not  called  up,  $25,695,037  in  cash 


1  The  Mexican  unit  is  the  dollar  or  peso,  which  is  worth  in  gold 
$0.983,  but  the  country  is  on  the  silver  basis,  which  makes  the  silver 
coins  worth  only  about  half  their  nominal  gold  value.     The  amounts 
in  the- text  are  expressed  in  Mexican  silver  dollars. 

2  L£vy,  271. 


41 6          HISTORY  OF  MODERN  BANKS   OF  ISSUE. 

items,  $14, 133,038   in  commercial   paper,    and    $11,372,706 
in  debtor  current  accounts.1 

The  Banks  of  Chile. 

Chile  has  been  in  recent  years  under  the  domination  of 
government  paper  money  and  legal  tender  bank-notes,  in 
spite  of  the  comparative  wealth  and  prosperity  of  the  republic 
among  other  South  American  countries.  Free  banking 
existed  in  Chile  up  to  1839,  when  a  law  was  passed  forbidding 
the  creation  of  banks  of  issue  without  the  authority  of  the 
governor  of  the  municipality  or  department  where  they  were 
established.  A  general  reform  of  the  banking  system  was 
made  by  the  law  of  July  23,  1860,  under  the  inspiration  of 
M.  Courcelle-Seneuil.2  This  law  limited  the  maximum  cir- 
culation to  one  and  one-half  times  the  capital  of  the  banks 
and  provided  that  the  notes  should  be  redeemable  in  specie, 
and  in  case  of  default  should  constitute  a  judgment  (titres 
extcutoires)  against  the  goods  and  persons  of  the  proprietors. 
The  issue  of  the  notes  was  placed  under  the  supervision  of 
the  public  authorities  by  requiring  the  signature  and  seal  of 
the  superintendent  of  the  mint.  Shareholders  were  liable 
only  for  the  amount  of  their  shares,  loans  to  officers  and 
directors  were  required  to  be  specially  recorded,  and  the 
books  and  cash  were  to  be  open  to  government  inspection.3 
These  regulations  are  still  in  force,  but  the  readjustment  of 
the  monetary  standard  has  led  to  some  recent  changes  in  the 
provisions  governing  the  circulation. 

The  suspension  of  specie  payments  in  Chile  was  decreed 
in  1865,  but  was  brought  to  an  end  on  August  31,  1866. 
The  specie  basis  was  again  abandoned  and  forced  legal  tender 
decreed  by  a  law  of  July  25,  1878,  which  fixed  the  maximum 
circulation  at  15,000,000  piasters  ($13, 600,000),  divided 
among  eleven  banks  which  subscribed  to  a  new  loan.  The 

1  The  author  is  indebted  to  Senor  Romero,  the  Mexican  Minister  at 
Washington,  for  the  latest  figures  from  the  Diario  Oficial,  Jan.  3,  1896. 

2  Levy,  291. 

3  Comptroller's  Report,  1895,  Letter  of  Minister  Edward  H.  Stro- 
bel,  68. 


THE  BANKS  OF  LATIN  AMERICA.  417 

government  resorted  to  legal  tender  paper,  issued  directly  by 
the  Treasury,  during  the  war  with  Peru,  and  the  amount 
had  risen,  on  January  5,  1881,  to  40,000,000  piasters.  The 
banks,  at  the  outbreak  of  the  revolution  against  President 
Balmaceda  in  1891,  had  a  circulation  of  about  15,000,000 
piasters,  upon  a  capital  of  30,000,000  piasters  and  a  reserve 
of  6,000,000.  The  circulation  increased  after  the  fall  of 
Balmaceda  to  20,000,000  piasters,  and  the  government  paper 
money  increased  to  42,000,000  piasters.  The  Junta  estab- 
lished at  Iquique  during  the  civil  war  proclaimed  liberty  of 
note  issues,  and  the  Bank  of  Tarapaca,  the  railway  companies, 
the  municipality  of  Iquique,  the  principal  corporations  and 
business  houses,  and  even  retail  tradesmen,  issued  their  own 
notes.  The  notes  were  not  legal  tender  and  the  public  ac- 
cepted those  they  regarded  as  good  and  rejected  those  they 
regarded  as  bad,  but  the  return  of  civil  order  was  followed 
by  the  redemption  of  the  paper  in  nearly  every  case.  The 
government  made  an  unsuccessful  effort  to  restore  specie 
payments  in  1892,  by  means  of  a  bond  issue  and  an  adjust- 
ment of  the  standard  to  meet  the  depreciation  of  the  paper 
money.  The  paper  continued  at  a  heavy  discount  and  a 
new  law  was  pushed  through  Congress  early  in  1895,  still 
further  reducing  the  standard.  The  "dollar"  was  made 
the  monetary  unit,  but  was  reduced  to  one-thirteenth  part 
of  a  pound  sterling  or  about  36.49  cents  in  United  States 
gold  coin.  Gold  was  made  the  monetary  standard  and  was 
to  be  paid  out  for  paper,  beginning  June  i,  1895.  Resump- 
tion was  begun  under  these  requirements,  but  the  foreign 
exchanges  were  for  some  time  unfavorable  and  gold  was 
largely  exported. 

The  law  of  1895  Put  a  limit  of  24,000,000  dollars  ($9,000,- 
ooo)  upon  bank-note  issues  until  December  31,  1897,  appor- 
tioned to  the  paid-up  capital  of  the  banks,  and  provided  that 
the  notes  should  be  guaranteed  to  their  full  amount  by 
deposits  in  the  public  treasury  of  gold,  government  notes, 
municipal  bonds,  treasury  bills,  or  bonds  of  mortgage  banks. 
These  notes  are  to  be  receivable  in  payment  of  taxes  until 

December  31,   1897.     The  notes  constitute  the  first  lien  on 
27 


41 8          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

the  assets,  and  in  case  of  failure  the  securities  in  the  treasury 
are  to  be  sold  for  the  benefit  of  the  note-holders. 1  The  total 
circulation  of  the  Chilean  banks  on  August  31,  1895,  ex~ 
pressed  in  Chilean  money,  was  $19,304,386,  deposits  were 
$114,228,282,  and  gold  holdings  were  $3, 55 7, 695.  The  Bank 
of  Chile,  by  far  the  largest  institution  in  the  country,  had 
on  August  31,  1895,  $10,639,595  in  outstanding  notes, 
$50,705,626  in  deposits,  and  a  paid-up  capital  of  $20,000,- 
ooo.  Its  advances  and  amounts  receivable  were  $64,374,979 
and  its  cash,  including  government  notes  and  checks,  was 
$8,995,213- 

The  Banks  of  Brazil. 

The  government  of  Brazil  succeeded  in  1888,  before  the 
overthrow  of  the  Kmpire,  in  restoring  the  parity  of  the 
paper  currency  based  upon  the  gold  standard.  The  milreis 
was  worth  fifty-four  and  six-tenths  cents  in  United  States 
currency,  and  foreign  exchange  was  substantially  at  par. 
The  circulation  at  the  time  of  the  fall  of  the  Empire  in  1889- 
was  about  200,000,000  milreis  ($109,000,000)  in  paper.  Two 
banks  were  founded  at  about  this  time  with  the  support  of 
French  capitalists, — the  National  Bank  of  Brazil  and  the 
Bank  of  the  United  States  of  Brazil.  They  had  been  in 
operation  but  a  short  time  when  a  decree  of  President  Fon- 
seca  in  December,  1890,  based  upon  a  report  by  Ruy  Barbosa, 
the  Minister  of  Finance,  authorized  the  union  of  the  two 
institutions  under  the  name  of  the  Bank  of  the  Republic  of 
the  United  States  of  Brazil,  with  a  capital  of  200,000,000 
milreis.  The  new  bank  was  authorized  to  issue  notes  to 
three  times  the  amount  of  its  gold  reserve,  and  the  charter 
provided  that  the  government  should  grant  the  right  of 
note  issue  in  future  to  no  new  banks  and  that  the  circulation 
of  existing  banks  should  be  remitted  to  the  new  establish- 
ment as  the  old  ones  surrendered  their  privileges.  The 
existing  banks  of  issue  numbered  six,  with  a  limit  of  cir- 
culation of  166,000,000  milreis.  The  new  bank  undertook 

1  Bulletin  of  the  Bureau  of  the  American  Republics,  April,  1895, 
670-74. 


THE  BANKS  OF  LATIN  AMERICA.  419 

the  retirement  of  the  government  paper  money,  which  had 
been  in  circulation  for  some  fifteen  years  and  still  amounted 
in  June,  1891,  to  168,000,000  milreis. 

A  new  organization  was  given  to  the  Bank  of  the  United 
States  of  Brazil  by  an  Act  of  December  17,  1892,  under  the 
title  of  the  Bank  of  the  Republic  of  Brazil.  The  capital  was 
reduced  from  190,000,000  milreis  to  150,000,000  milreis,  the 
notes  were  made  legal  tender,  and  the  bank  was  pledged  to 
retire  100,000,000  milreis  in  bills  within  the  year  1893. l  The 
circulation  of  the  bank,  including  interest-bearing  bonds, 
which  were  made  legal  tender  and  receivable  at  public 
depositaries,  and  including  the  circulation  of  other  bank  bills 
assumed  by  the  consolidated  bank,  reached  379,390,720  mil- 
reis ($205, 000,000)  and  the  government  paper  money  reached 
200,000,000  milreis  ($iO9,ooo,ooo)2.  This  was  the  situation 
early  in  1893,  but  the  suspension  of  specie  payments  as  the 
result  of  a  new  civil  war  led  to  repeated  new  issues  of  paper 
money  and  a  constantly  growing  premium  on  gold.  The 
pledge  to  retire  paper  money  and  bank-notes  in  1893  was 
partially  kept,  only  to  be  followed  by  new  issues  larger  than 
those  withdrawn.  The  total  circulation  was  thus  forced  up 
early  in  1894  to  713,000,000  milreis, — of  the  nominal  value 
of  $385,000,000  in  United  States  money,  but  an  actual  value 
of  much  less, — but  some  reduction  was  made  during  1894 
and  1895,  aud  the  paper  circulation  was  computed  in  the 
latter  year  at  340, 7 11,370  milreis  in  bank-notes  and  367,358,- 
652  milreis  in  government  notes.3  The  statutes  establishing 
the  bank  provide  for  the  resumption  of  specie  payments  as 
soon  as  foreign  exchange  has  been  maintained  for  one  year 
at  par  or  as  soon  as  the  forced  legal  tender  of  the  bills  shall 
be  suspended.  The  government,  however,  has  employed  the 
deposits  of  the  banks  for  war  expenses  and  resumption  does 
not  seem  to  be  at  hand.  Foreign  commerce  has  enjoyed  the 
benefit  which  is  attributed  to  an  unfavorable  exchange  in 
stimulating  exports,  but  in  1892  the  rise  of  prices  in  dispro- 

1  Revue  des  Banques,  January,  1893,  XII.,  293. 

2  L£vy,  282-84. 

3  Revue  des  Banques,  July,  1895,  XIV.,  141. 


420          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

portion  to  wages  drove  Italian  and  other  European  laborers 
out  of  the  country  to  such  an  extent  that  coffee  planting 
could  not  command  the  necessary  number  of  hands.1 

Banking  in  Argentina. 

The  forced  legal  tender  of  paper  currency  is  declared  by 
M.  Levy  to  have  been,  ''since  1826,  a  chronic  malady,  with 
rare  intermissions,  in  the  Argentine  Republic."  *  The  his- 
tory of  the  country  for  the  years  prior  to  the  crisis  of  1890  was 
the  story  of  unduly  expanded  credit,  discounting  too  rapidly 
the  possibilities  of  the  future,  which  was  witnessed  in  the 
United  States  in  1837  an(^  l857  an^  more  recently  in  Aus- 
tralia. The  oldest  bank  of  the  Argentine  Republic  was  the 
Bank  of  the  Province  of  Buenos  Ayres,  which  was  founded 
as  a  private  bank  in  1822,  but  was  purchased  by  the  State  in 
1826  from  the  proceeds  of  an  English  loan.  It  was  authorized 
as  a  state  bank  to  issue  circulating  notes  redeemable  in  silver. 
The  issues  were  excessive  and  had  depreciated  in  1868  to  a 
value  of  four  cents  on  the  dollar.  The  bank  was  then  au- 
thorized to  convert  the  notes  into  a  new  issue  and  continued 
in  operation  until  1891.  The  Bank  of  the  Nation  {Banco  de 
la  Nation)  was  created  by  the  Act  of  November  5,  1872,  limit- 
ing the  circulation  to  double  the  paid-up  capital  and  requir- 
ing a  cash  reserve  of  at  least  one-fourth  of  the  outstanding 
notes.  The  government  subscribed  for  $2,000,000  of  the 
capital  stock,  which  was  fixed  at  $5,ooo,ooo.3  The  bank 
was  given  continuance  for  twenty  years  and  its  notes  were 
legal  tender. 

The  banking  system  which  was  established  in  1887,  and 
which  broke  down  so  completely  in  1890,  was  peculiar  in  the 
fact  that  the  circulating  notes  purported  to  combine  the 
double  guarantee  of  metallic  coverture,  so  dear  to  the  fraru- 

1  London  Bankers'  Magazine,  January,  1893,  LV.,  79. 

2  Melanges  Financiers,  286. 

3  The  Argentine  monetary  unit  is  the  peso  ($.965),  equal  to  five 
francs,  but  its  value  is  so  near  that  of  the  dollar  that  Argentine  cur- 
rency is  often  stated  in  dollars. 


THE  BANKS  OF  LATIN  AMERICA.  421 

ers  of  the  English  Act  of  1844,  and  the  coverture  by  means 
of  evidences  of  the  public  debt,  which  is  the  basis  of  the 
national  banking  system  of  the  United  States.  But  the 
gold  was  borrowed,  the  issue  of  evidences  of  the  public  debt 
went  beyond  legitimate  currency  requirements  and  the  guar- 
antees proved  of  no  avail  against  inflation,  depreciation,  and 
resulting  insolvency.  The  Bank  of  the  Nation  was  reor- 
ganized under  the  Guaranteed  Banking  Act  of  November 
3,  1887.  This  Act  authorized  the  issue  of  notes  by  any 
provincial  bank  which  complied  with  the  requirement  of  a 
deposit  of  government  bonds.  A  special  issue  of  four  and  a 
half  per  cent,  gold  bonds  was  authorized  by  the  general 
government  as  the  basis  of  this  circulation,  and  in  order  to 
secure  the  gold  required  to  buy  these  bonds  each  of  the 
provinces  desiring  a  provincial  bank  sold  abroad  a  special 
issue  of  its  own  gold  bonds.  The  gold  received  was  paid 
into  the  national  Treasury  for  the  national  bonds  and  the 
banks  of  the  provinces  were  authorized  to  issue  an  amount 
of  paper  money  equal  to  the  bonds  thus  purchased.  The 
provinces  became  responsible  for  the  issue  of  paper  money 
by  the  respective  provincial  banks.1  A  considerable  sum  of 
gold  was  obtained  by  the  sale  of  bonds,  which  resulted  in  a 
great  inflation  of  the  prices  of  property  on  which  loans  were 
made  by  the  banks. 

Bad  banking  and  excessive  issues  wrecked  the  new  sys- 
tem within  four  years,  and  sent  gold  to  300  per  cent,  in 
paper,  in  spite  of  the  security  of  the  note  issues.  Every 
bank  of  issue  suspended  in  1891  and  is  still  in  process  of 
liquidation.  The  guaranteed  bonds  issued  to  found  the  sys- 
tem were  estimated  to  be  outstanding  in  1893  to  the  amount 
of  $100,082, 965. 3  The  inflation  had  been  aided  by  the  issue 
of  paper  money  without  special  guarantee,  but  it  was  the 
opinion  of  the  executive  power  that  the  Guaranteed  Bank- 
ing Act  was  the  cause  of  the  crisis.3  The  government  as- 

1  Comptroller's  Report,  1895,  Letter  of  Minister  William  I.  Bucha- 
nan, 596. 

2  London  Bankers'  Magazine,  March,  1893,  L,V.,  408-16. 

3  L£vy,  286. 


422          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

sumed  responsibility  for  the  outstanding  paper  and  required 
the  surrender  of  the  bonds  and  specie  held  by  the  banks.  It 
was  necessary  to  have  some  banking  institution  to  permit 
the  continuance  of  government  finance,  and  the  Bank  of  the 
Argentine  Nation  was  erected  in  December,  1891,  upon  the 
ruins  of  the  old  Bank  of  the  Nation  and  of  the  provincial 
banks.  The  bank  was  opened  with  a  capital  of  $50,000,000, 
entirely  paid  in  paper.  The  affairs  of  the  old  national  bank 
were  made  over  to  the  new  bank  and  its  shareholders  given 
a  preference  in  the  subscriptions  to  the  new  stock.  The  bank 
was  allowed  to  issue  notes  to  the  amount  of  seventy-five  per 
cent,  of  the  internal  bonds  deposited  as  a  guarantee.1  The 
attempt  to  sell  stock  to  the  public  proved  a  failure  and 
the  capital  of  the  bank  was  furnished  exclusively  by  the 
Treasury. 

Banking  in  Paraguay. 

Banking  in  Paraguay  has  been  in  a  somewhat  chaotic  state 
since  the  collapse  of  credit  in  the  Argentine  Republic,  of 
which  the  country  is  a  near  neighbor.  The  circulation  was 
issued  for  many  years  by  the  National  Bank  of  Paraguay, 
in  which  the  government  was  a  large  shareholder.  The 
gold  unit  of  value,  prior  to  the  suspension  of  specie  pa)r- 
ments,  was  the  English  pound  sterling,  and  five  paper 
dollars  were  paid  for  ^i  in  gold.  The  suspension  of  the 
National  Bank  of  the  Argentine  Republic  on  January  i, 
1885,  was  not  followed  at  once  by  suspension  in  Paraguay, 
but  later  in  the  year  gold  went  to  a  premium  of  fifty  per 
cent.  The  National  Bank  had  the  option  of  redeeming  in 
gold  or  silver,  and  redeemed  in  silver  until  1889,  when  the 
Bank  of  Paraguay  and  the  River  Plate  was  founded,  redeem- 
ing its  notes  exclusively  in  silver.  Both  banks  were  sub- 
jected to  a  severe  run  in  1890,  their  silver  reserves  were 
reduced,  and  gold  went  to  300  per  cent,  in  paper.  The 
National  Bank  suspended  the  payment  of  its  obligations 
and  announced  that  it  would  be  compelled  to  grant  an  ex- 
tension to  its  customers,  many  of  whom  were  land  owners  of 

1  London  Bankers'  Magazine,  June,  1892,  LIU.,  905. 


THE  BANKS  OF  LATIN  AMERICA.  423 

large  means,  but  unable  to  meet  their  immediate  obligations. 
The  bank  was  granted  by  law  a  ten  years'  extension  of  time 
within  which  to  collect  its  credits  and  settle  its  debts,  and 
debtors  were  expected  to  pay  their  indebtedness  in  quarterly 
instalments  during  the  ten  years.  The  money  had  originally 
been  borrowed  upon  a  specie  basis,  but  was  to  be  paid  back 
in  paper.  Even  these  payments  were  not  made,  and  in 
August,  1894,  the  bank  agreed  to  accept  fifty  per  cent,  of  the 
amounts  due.  Many  debtors  paid  under  this  condition,  but 
the  demand  for  money  drove  up  the  interest  rates  so  sharply 
that  others  were  prevented  from  making  payment  within 
the  three  months  allowed.1  The  affairs  of  the  bank  are  now 
in  process  of  liquidation  through  a  syndicate. 

The  Bank  of  Paraguay  and  the  River  Plate  (Banco  Para- 
guay y  de  la  Plata]  was  founded  with  a  capital  of  $8,000,000 
in  Paraguayan  money,  worth  at  the  time  of  its  foundation  in 
1889  about  66|  cents  to  the  dollar  in  gold,  but  now  worth 
about  eighteen  cents.  The  government  subscribed  one- 
quarter  of  the  capital  through  a  bond  for  ,£400,000  nego- 
tiated at  six  per  cent.,  and  receives  five  per  cent,  of  the 
profits  of  the  Bank  of  Paraguay  in  compensation  for  the 
privileges  of  the  charter.  The  present  paper  circulation  of 
Paraguay  is  about  $5,000,000,  with  a  gold  value  of  about 
$850,000.  The  only  provision  now  in  force  for  the  redemp- 
tion of  notes  is  through  the  customs,  of  which  five  per  cent, 
are  set  aside  for  redemption  purposes.  There  is  a  difference 
of  opinion  in  Paraguay  whether  to  destroy  the  notes  thus 
redeemed  or  to  employ  them  in  the  purchase  of  gold.  The 
business  is  managed  by  the  Agricultural  Bank  (Banco  Agri- 
cola},  which  is  an  institution  under  the  entire  charge  of  the 
government  and  is  governed  by  a  directory  of  five  members 
named  by  the  executive. 

Banking  in   Uruguay. 

Uruguay  was  until  recently  under  the  regime  of  free  bank- 
ing and  is  still  upon  the  gold  basis.  There  was  in  circula- 

1  Letter  of  Vice-Consul  Bben  M.  Flagg,  Comptrollers^  Report,  1895, 
92- 


424          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

lation  a  considerable  issue  of  government  paper  money,  but 
it  was  entirely  withdrawn  at  the  end  of  September,  1892. 
The  country  has  made  several  experiments  with  government 
banks,  but  they  have  been  mismanaged  and  have  gone  out 
of  existence.  The  National  Bank  was  the  last  of  these 
institutions.  The  circulation  on  September  30,  1893,  was 
780,000  piasters  ($800,000)  and  that  of  the  London  and 
River  Plate  Bank  was  2,600,000  piasters,  which  was  in- 
creased a  year  later  to  2,940,000  piasters.  The  law  of  March 
23,  1865,  prescribed  uniform  rules  for  the  government  of 
banks  of  issue.  One  of  these  rules  fixed  the  circulation  at 
three  times  the  capital,  but  this  was  limited  in  1870  to  twice 
the  capital  actually  paid  up.1  The  private  banks  in  1893  re- 
nounced the  right  of  circulation  and  it  was  decided  to  author- 
ize no  additional  banks  of  issue.  The  two  such  banks  now  in 
existence  are  the  London  and  River  Plate  Bank,  owned  and 
managed  in  London,2  and  the  Italian  Bank  of  the  River 
Plate.  Banks  of  issue  pay  an  annual  patent  tax  of  $2000, 
which  is  twice  the  tax  imposed  on  banks  of  other  classes.3 
The  government  is  not  a  shareholder  in  any  of  the  existing 
banks,  but  is  responsible  for  the  liquidation  of  the  National 
Bank  and  named  one  of  the  three  members  of  the  liquida- 
ting committee  of  the  English  Bank  of  the  River  Plate.4 
Each  bank  is  required  to  redeem  its  notes  in  gold  on  demand. 

1  L£vy,  281. 

2  This  bank  does  business  in  several  other  South  American  coun- 
tries, but  its  issue  of  circulating  notes  is  limited  to  Uruguay.     The 
capital  of  the  bank  is  ^900,000,  and  the  current  accounts  on  Septem- 
ber 30,  1895  were  ^9,729,245.     The  bank  carried  cash  to  the  large 
amount  of  ^6,037,411,  which  was  a  more  effective  resource,  in  the 
opinion  of  the  chairman  of  the  board  of  directors,  than  any  form  of 
securities,  and  had  much  to  do  with  enabling  the  bank  to  weather  the 
storm  of  the  crisis  in  Argentina,  Uruguay,  and  Paraguay,  which  swept 
away  so  mauy  other  banking  institutions. — London  Bankers'  Maga- 
zine, January,  1895,  LJX.,  98. 

3  Letter  of  Minister  Granville  Stuart,  Comptroller's  Report,  1895,  105. 

4  The  President  of  the  Republic  recommended  in  December,  1895, 
the  creation  of  a  new  National  Bank,  with  a  capital  of  $10,000,000,  of 
which  a  considerable  portion  is  to  be  sought  in  London. — London 
Bankers'  Magazine,  Feb.,  1896,  LXL,  247. 


THE  BANKS  OF  LATIN  AMERICA.  42$ 

Bank-notes  are  not  a  legal  tender,  but  are  a  first  lien  on  the 
assets  of  the  banks  and  are  limited  to  a  minimum  denomi- 
nation of  ten  piasters  ($10.30).  The  Italian  Bank  showed 
total  assets  on  December  31,  1894,  of  $8,798,570,  of  which 
$5,109,197  was  in  securities  and  $896,711  in  cash.  The  lia- 
bilities were  $1,500,000  for  capital,  $851,230  for  circulation, 
and  $5,109,197  for  deposits. 

The  Banks  of  the  Northern  States. 

Banking  in  Venezuela  is  governed  by  the  law  of  May  7, 
1895,  which  permits  the  creation  of  banks  of  issue  under 
fixed  conditions.  The  notes  are  not  legal  tender  and  can  be 
issued  to  the  amount  of  no  more  than  fifty  per  cent,  of  the 
paid-up  capital.  The  banks  are  required  to  redeem  their 
notes  in  lawful  money  on  demand,  at  the  central  office  and 
the  branches.  Twenty-five  per  cent,  of  the  capital  of  a  pro- 
posed new  bank  is  required  to  be  held  as  a  cash  reserve.  •  The 
banks  of  issue  are  forbidden  to  loan  on  their  own  shares  or 
to  make  loans  which  will  lock  up  their  capital  for  over  six 
months.  Balance  sheets  must  be  published  quarterly,  show- 
ing, among  other  things,  the  loans  to  directors  and  officers, 
and  changes  in  the  by-laws  must  be  promptly  communicated 
to  the  government.  The  national  executive  is  empowered 
to  appoint  an  inspector  for  each  bank  with  power  to  exam- 
ine books  and  cash.1  The  only  banks  in  operation  are  those 
of  Caracas  and  Maracaibo.  Their  circulation  on  Decem- 
ber 31,  1894,  was  2,382,660  bolivars  ($450,000). 

The  system  of  government  paper  currency  which  pre- 
vailed for  many  years  in  Colombia  has  recently  been  a  sub- 
ject of  legislation  with  a  view  to  raising  its  value  and 
permitting  the  creation  of  a  banking  system.  The  law  of 
November  21,  1894,  provided  for  the  coinage  of  silver  pieces 
of  ten  and  twenty  cents  and  the  retirement  of  paper  notes 
of  the  same  denominations.  The  National  Bank  was  to  be 
reduced  to  a  section  of  the  Treasury  Department  and  its 
commercial  affairs  liquidated.  The  power  to  issue  circulat- 

1  Gaceta  Official,  Caracas,  May  10,  1895,  Ley  de  Bancos. 


426          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

ing  notes  was  declared  by  the  new  law  to  belong  exclusively 
to  the  nation  and  was  not  to  be  delegated  until  paper  money 
should  be  at  par  with  silver.  Banks  of  circulation  estab- 
lished after  these  conditions  were  restored  were  required  to 
have  not  less  than  $250,000  in  legal  silver  or  gold  money. 
The  limit  of  issues  is  double  the  amount  of  the  metallic 
reserve  and  the  privilege  cannot  be  granted  for  a  longer 
period  than  seven  years,  but  may  be  renewed.1  The  bank- 
note circulation  at  the  end  of  1894  was  $26,109,557. 

The  two  leading  banks  of  issue  in  Ecuador  were  until 
recently  the  Bank  of  Ecuador  and  the  International  Bank, 
and  their  notes  were  maintained  at  par  and  were  preferred 
to  silver.  The  International  Bank  has  recently  been  merged 
with  the  Bank  of  Commerce  and  Agriculture,  established  at 
Guayaquil,  with  a  capital  of  5,000,000  sucres  ($2,500,000). 
The  capital  of  the  Bank  of  Ecuador,  established  in  1867  at 
Guayaquil,  is  2,000,000  sucres.  The  banks  are  allowed  to 
issue  circulation  to  the  amount  of  three  times  their  coin 
reserve  in  silver.  They  are  subject  to  examination  by  gov- 
ernment officials,  but  are  private  corporations  and  the  share- 
holders are  subject  to  no  liability  beyond  their  investment.2 
The  outstanding  circulation  is  about  4,500,000  sucres. 

Several  banks  of  circulation  exist  in  Bolivia  and  issue 
notes  under  legal  regulations.  The  National  Bank  of 
Bolivia  is  located  at  Sucre  and  has  a  capital  of  2,600,000 
bolivars  ($2,600,000).  The  Francisco  Argandona  Bank  at 
Sucre,  founded  in  1893,  nas  a  capital  of  100,000  bolivars. 
The  Bank  of  Potosi  is  also  a  bank  of  issue.  The  circulation 
of  the  National  Bank  on  June  30,  1893,  was  3,532,000,  boli- 
vars and  of  the  Francisco  Argandona  Bank  on  December  31, 
1893,  393.000  bolivars.  The  metallic  reserve  in  each  case 
was  about  one-fourth  of  the  circulation.3 

There  are  no  banks  of  issue  in  Peru,  but  the  existing  dis- 

1  Monthly  Bulletin  of  the  Bureau  of  the  American  Republics,  Feb- 
ruary, 1895,  II.,  570-72. 

3  Comptroller's  Report,  1895,  Letter  of  Minister  James  D.  Tillman, 
78-9. 

3  L£vy,  279. 


THE  BANKS  OF  LATIN  AMERICA.  427 

count  banks  hold  government  paper  money  in  their  cash 
reserves.  This  money  was  issued  to  the  amount  of  100,- 
000,000  soles  ($100,000,000)  during  the  war  with  Chile,  but 
has  been  largely  retired,  leaving  actual  transactions  to  be 
carried  on  in  silver.  The  banks  are  permitted  to  establish 
branches  and  are  required  to  pay  five  per  cent,  of  their  net 
profits  as  a  patent  tax.1 

The  National  Bank  of  Haiti. 

'  The  exclusive  privilege  of  issuing  bills  to  bearer,  payable 
in  specie  on  presentation,"  was  conferred  on  the  National 
Bank  of  Haiti  by  the  decree  of  the  National  Assembly  of 
April  i,  1880.  The  Bank  was  founded  by  French  capital- 
ists, with  a  capital  of  10,000,000  francs  ($2,000,000),  and  its 
privileges  were  conferred  for  fifty  years.  The  charter  re- 
quired the  coin  reserve  to  equal  at  least  one-third  of  the 
circulation  and  made  the  notes  legal  tender  throughout  the 
republic.  The  founders  of  the  bank  secured  from  the  gov- 
ernment a  pledge  to  adopt  a  national  currency  and  this  was 
done  by  making  the  gourde  the  unit  (equal  to  five  French 
francs)  and  providing  for  gold  and  silver  coinage  at  the  Paris 
mint.  The  government  went  further  and  violated  the  privi- 
leges of  the  bank  by  issuing  a  national  paper  currency, 
amounting  to  1,000,000  gourdes  in  1884,  and  eventually  to 
6,200,000  gourdes.3  The  amount  has  been  somewhat  re- 
duced, but  has  in  the  meantime  deranged  the  financial  sys- 
tem and  substantially  deprived  the  bank  of  the  power  of 
issuing  its  own  notes.  The  bank  was  required  by  a  law  of 
September  29,  1892,  to  issue  notes  of  one  and  two  gourdes 
on  account  of  the 'government.3  More  recently  (in  1895) 
the  National  Assembly  has  authorized  a  loan  for  50,000,000 
francs  in  Hurope,  with  which  it  is  proposed  to  establish  the 
gold  standard.  The  National  Bank  manages  the  public  debt 


1  Comptroller's  Report,  1895,  Letter  of  Richard  R.  Neill,  Charge 
d'  Affaires,  94. 

*  Comptroller's  Report,  1895,  Letter  of  Minister  John  B.  Ferris,  86. 
,  274. 


428         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

and  is  exempt  from  taxation  upon  its  property  and  notes. 
None  of  its  own  notes  have  been  in  circulation  during  the 
recent  paper  money  regime,  but  the  bank  has  done  a  consid- 
erable discount  business  through  several  branches.  One  of 
the  branches  is  at  Paris. 

San  Domingo  also  has  a  National  Bank  endowed  with  the 
power  of  note  issue  and  in  1894  adopted  the  gold  standard, 
with  the  United  States  dollar  as  the  monetary  unit. 

The  Banks  of  Central  America. 

The  republic  of  Salvador  contains  five  banks  of  issue, 
with  special  charters  granted  by  the  government,  under  the 
provisions  of  a  general  law.  The  banks  are  allowed  to  issue 
notes  to  the  amount  of  twice  their  subscribed  capital,  but 
are  required  to  hold  forty  per  cent,  of  the  amount  of  the 
circulation  in  silver  coin.  The  Industrial  Bank  is  required 
to  hold  a  reserve  of  fifty  per  cent,  against  its  notes,  but 
thirty  per  cent,  of  the  mortgages  held  may  be  counted  as 
the  equivalent  of  coin.  Notes  are  redeemable  in  silver  coin 
on  demand.  The  five  banks  in  operation  are  the  Interna- 
tional Bank  of  Salvador,  with  a  capital  of  $3,000,000 ;  1  the 
Western  Bank  {Banco  Occidental),  with  a  capital  of  $2,000,- 
ooo ;  the  Salvadorean  Bank  {Banco  Salvadorend)  with  a 
capital  of  $3,000,000 ;  The  Industrial  Bank  of  Salvador 
{Banco  Industrial  del  Salvador},  with  a  capital  of  $2,000,000  ; 
and  the  London  Bank  of  Central  America.  The  latter  in- 
stitution has  only  a  branch  in  Salvador,  and  the  proportion 
of  the  capital  there  employed  is  not  absolutely  fixed.  The 
aggregate  circulation  of  the  four  domestic  banks  is  about 
$5,ooo,ooo.2 

The  only  bank  in  Nicaragua  is  the  London  Bank  of  Cen- 
tral America,  Limited,  whose  head  office  is  in  London.  The 
bank  was  founded  in  1888,  with  a  nominal  capital  of  ^"600,- 

1  The  monetary  unit  in  Central  America  is  the  peso,  nearly  equal 
at  the  old  parity  of  gold  and  silver  to  the  United  States  dollar,  but  the 
depreciation  of  silver  makes  its  present  bullion  value  about  50  cents. 
Most  of  the  sums  stated  in  dollars  represent  pesos. 

2  Comptroller's  Report,  1895,  Letter  of  Minister  Lewis  Baker,  99-101. 


THE  BANKS  OF  LATIN  AMERICA.  429 

ooo,  under  the  name  of  the  Bank  of  Nicaragua,  but  only 
19,567  of  the  60,000  shares  have  been  issued  and  only  fifty 
per  cent,  has  been  paid  up  on  these.  The  shareholders  are 
liable  only  for  the  amount  of  their  stock,  and  government 
officials  have  the  right  at  any  time  to  make  an  inspection  of 
the  books  and  cash  of  the  bank.  The  reserve  is  required  to 
be  kept  in  silver  and  must  equal  forty  per  cent,  of  the  out- 
standing circulation.  The  bank  is  not  subject  to  special 
taxes  and  has  the  privilege  of  using  the  national  railway, 
steamship,  telegraph,  and  telephone  lines  without  charge.1 
The  notes  of  the  bank  are  registered  in  the  State  Treasury 
and  amounted  on  December  31,  1894,  to  ^99. 2&9-  The  de- 
posits and  current  accounts  were  ,£89,751,  and  the  reserve 
funds,  including  ,£12,000  to  cover  depreciation  in  exchange, 
were  ,£"23,734.  The  cash  in  hand  was  .£154,075  ;  bills  re- 
ceivable, ,£88,526,  and  loans,  ,£68,758. 

Semi-annual  reports  are  required  of  banks  of  issue  in 
Guatemala  and  the  government  designates  experts  to  make 
periodical  examinations  of  their  books.2  A  cash  reserve  of 
fifty  to  sixty  per  cent,  is  usually  required  to  be  held  against 
notes,  but  the  charters  granted  have  not  been  uniform  in 
their  requirements.  The  four  existing  banks  of  issue  are 
the  International  Bank  ;  the  Commercial  Bank  of  Guatemala  ; 
the  Colombian  Bank,  with  a  paid-up  capital  of  1,630,000 
pesos  ;  and  the  Bank  of  the  Occident,  with  a  paid-up  capital 
of  i,  500, ooo  pesos.  The  International  Bank  had  a  circulation 
on  December  31,  1894,  °f  $2> 539>747  ;  deposits  and  current 
accounts,  $3,668,270;  reserve  fund,  $950,000;  cash,  $3,878,- 
584;  discounts  and  advances,  $4,540,608.  The  bank  also 
holds  among  its  securities  $382,190  in  British  Consols  and 
United  States  four  per  cent,  bonds.3  The  Colombian  Bank 
had  a  circulation  on  December  31,  1894,  °f  $434>II2J  the 
Commercial  Bank,  $1,220,011  ;  and  the  Bank  of  the  Occident, 
$1,408,029. 

1  Comptroller's   Report,  1895,  Letter  of  Minister  Lewis  Baker,  106. 

2  Comptroller's  Report,  1895,  Letter  of  D.  Lynch  Pringle,  Charge^ 
<T  Affaires,  85. 

3  London  Bankers'  Magazine,  May,  1895,  LIX,  729. 


430          HISTORY  OF  MODERN  BANKS   OF  ISSUE. 

Costa  Rica  has  both  government  paper  money  and  bank- 
notes in  circulation.  The  latter  are  issued  chiefly  by  the 
Bank  of  Costa  Rica,  which  has  a  capital  of  $1,155,000  and 
a  circulation  of  about  $3,500,000.' 

The  Banks  of  European   Colonies. 

The  banks  of  issue  of  the  French  colonies  in  America 
were  authorized  by  laws  of  the  republic  passed  in  1849, 
which  put  them  under  the  supervision  of  the  home  govern- 
ment and  under  certain  general  regulations.  These  banks 
were  authorized  to  issue  notes  no  smaller  than  25  francs  ($5) 
until  1874,  when  the  law  of  June  24th  reduced  the  limit  to 
five  francs  ($i).  The  circulation  was  limited  to  three  times 
the  metallic  reserve  and  the  liabilities  were  not  permitted  to 
exceed  three  times  the  capital.  The  French  colonial  banks 
have  a  common  agency  at  Paris  under  the  supervision  of  the 
Minister  for  the  Colonies.2  The  Bank  of  Martinique  and 
the  Bank  of  Guadeloupe  were  each  established  in  1853,  with 
a  capital  of  3,000,000  francs,  while  the  Bank  of  French 
Guiana  was  founded  in  1855  with  a  capital  of  300,000  francs, 
which  w7as  increased  in  1864  to  600,000  francs.  The  two 
older  banks  have  loaned  largely  on  the  growing  crops,  which 
has  brought  them  difficulties  and  losses  in  years  wrhen  the 
crops  have  failed,  but  has  contributed  greatly  to  the  con- 
venience of  the  community.  The  Bank  of  Guadeloupe  has 
a  circulation  of  about  7,000,000  francs  ;  the  Bank  of  Mar- 
tinique, 8,000,000  francs  ;  and  the  Bank  of  French  Guiana, 
1,600,000  francs.3  The  Bank  of  Guadeloupe  paid  a  dividend 
in  1894  °f  twenty-one  per  cent,  on  the  nominal  capital,  and 
the  management  proposed  to  reduce  the  rate  on  loans  on  the 
crops  from  six  to  four  per  cent.4 

The  bank-note  circulation  of  the  British  West  Indies  and 
of  British  Guiana  is  largely  furnished  by  the  Colonial  Bank, 
with  headquarters  in  London  and  fifteen  branches  and 

1  L£vy,  277. 

2  Courtois,  190-94. 

3  Levy,  275. 

4  Revue  des  Banques,  August,  1895,  XIV.,  156. 


THE  BANKS  OF  LATIN  AMERICA.  431 

agencies.  The  bank  was  chartered  by  the  British  govern- 
ment in  1836  and  the  charter  was  renewed  in  1856.  The 
paid-up  capital  is  ,£600,000  and  the  total  liabilities  on 
June  30,  1895,  were  ;£4>759>642,  of  which  ,£452,672  was 
on  account  of  circulation,  £"1,724,346  on  account  of  deposits, 
and  £"1,794,963  for  bills  payable  and  other  liabilities.  The 
discounts  were  £"1,771,084  ;  bills  receivable,.  ,£1,464, 296,  and 
specie  £419, 988.'  Mr.  Muhleman  distributes  the  circulation 
among  the  various  colonies  as  follows  :  Jamaica,  $ 900,000 ; 
British  Guiana,  $300,000  ;  Trinidad,  $500,000  ;  Barbadoes, 
$160,000 ;  others,  $240, ooo.2  The  Nassau  Bank  furnishes 
a  part  of  the  circulation  in  the  Bahamas,  based  upon  coin 
and  British  and  United  States  bonds,  and  the  British  Guiana 
Bank  provides  a  part  of  the  circulation  for  the  colony  for 
which  it  is  named. 

The  Spanish  Bank  of  Cuba  has  provided  the  paper  circu- 
lation of  the  largest  island  of  the  West  Indies.  The  gov- 
ernment utilized  the  bank  during  the  insurrection  several 
years  ago  for  the  issue  of  legal  tender  paper  on  government 
account,  but  this  paper  was  withdrawn  in  1893.  The  capital 
of  the  bank  is  8,000,000  piasters  ($7,400,000).  Porto  Rico 
also  has  a  bank  of  issue,  known  as  the  Spanish  Bank  of 
Porto  Rico.  The  institution  was  founded  in  1891  and  has 
a  circulation  of  about  1,500,000  piasters.3 

Dutch  Guiana  is  provided  with  a  circulation  of  about 
1,000,000  florins  ($400,000)  by  the  Bank  of  Surinam.  St. 
Thomas  also  has  a  bank  of  her  own, — the  Bank  of  St. 
Thomas,  which  issues  notes  in  terms  of  dollars,  running  as 
low  as  $i. 

1  London  Bankers'  Magazine,  February,  1896,  LXI.  293. 
9  Monetary  Systems  of 'the  World,  113. 
,  276. 


CHAPTER  XVIII. 

BANKING  IN  AFRICA  AND  THK  EAST. 

The  Early  Banking  Experience  of  India  and  the  Present  Paper  Cur- 
rency— The  Banking  System  of  Japan  and  the  Beginning  of 
Banking  in  China — The  Bank  of  Persia — The  Recent  Failures  in 
Australia — The  Maintenance  of  the  Gold  Standard  in  Java — The 
Colonial  Banks  of  Great  Britain,  France,  Spain,  and  Portugal. 

THE  banking  experience  of  the  continents  of  Africa  and 
Asia  and  of  the  great  islands  of  the  Pacific  offers 
much  that  is  of  interest  to  the  financial  student  and 
historian,  in  spite  of  the  comparatively  recent  creation  of 
some  of  the  banking  systems.  The  influence  of  British  capi- 
tal and  British  models  is  more  apparent  even  than  in  Latin 
America  in  the  financial  system  of  British  India,  in  the  great 
colonies  of  Australia  and  in  the  institutions  which  handle 
exchange  with  South  Africa  and  the  free  ports  of  China. 
The  history  of  the  independent  banking  systems  of  the  East 
is  of  peculiar  interest  also,  because  it  has  put  to  the  test 
certain  economic  theories  under  conditions  which  could  not 
have  been  found  under  the  complicated  and  conservative 
financial  management  of  European  nations.  One  of  'the 
most  interesting  of  these  experiments  is  that  conducted  for 
nearly  twenty  years  in  the  Island  of  Java,  under  Dutch  con- 
trol, where  values  have  been  maintained  upon  the  gold 
standard  and  silver  coins  have  been  kept  at  parity  with  gold 
by  means  of  the  absolute  limit  put  upon  their  amount,  with 
scarcely  a  gold  guilder  in  circulation  and  a  merely  nominal 
supply  of  gold  in  the  reserves  of  the  Bank  of  Java.  Equally 
interesting  promises  to  be  the  experience  of  China,  whose 

432 


BANKING  IN  AFRICA   AND    THE  EAST.  433 

native  bankers  and  great  English  companies  are  soon  to  en- 
counter the  rivalry  of  a  bank  under  Russian  influence,  whose 
example  is  likely  to  invite  other  competitors  to  enter  the 
field. 

Banking  in  India. 

The  issue  of  circulating  notes  through  the  medium  of 
banks  was  brought  to  an  end  in  India  in  1861,  but  prior  to 
that  date  there  was  a  flourishing  system  of  banks  of  issue. 
Banking  in  India  in  the  early  days  of  European  supremacy 
was  subject  to  no  fixed  regulations.  The  bulk  of  the  busi- 
ness was  transacted  for  many  years  by  the  "  agency  houses," 
founded  by  civil  and  military  employees  who  had  retired 
from  the  active  service  of  the  East  India  Company  to  go  into 
private  business.  They  made  loans  to  the  company  at  a 
high  rate  during  the  latter  part  of  the  last  century,  but  the 
rate  had  fallen  by  1813  to  six  per  cent,  and  the  debt  had 
risen  to  ^27,000,000.  Some  of  these  houses  became  very 
powerful,  but  large  investments  in  industrial  establishments, 
which  suffered  many  failures  in  1828,  1829,  and  1830,  caused 
their  downfall.  The  total  liabilities  of  the  six  agency  houses 
which  failed  from  1830  to  1834  were  estimated  at  over  ^"17,- 
000,000  and  one  of  the  largest  paid  little  more  than  three 
per  cent.1 

The  era  of  responsible  banks  began  after  the  crisis.  The 
Bank  of  Bengal  had  been  founded  as  early  as  1809,  but  its 
charter  was  renewed  in  1840;  a  charter  was  issued  in  the 
same  year  to  the  Bank  of  Bombay,  with  a  capital  of  ^525,- 
ooo  ;  and  a  charter  was  issued  in  1842  to  the  Bank  of  Madras. 
The  private  banks  had  been  allowed  to  issue  notes  and  this 
was  true  also  of  the  Union  Bank  of  Calcutta,  founded  in 
1829,  and  the  Bank  of  Agra.  The  Bank  of  Bengal  in  1834 
refused  to  receive  the  notes  of  the  Union  Bank  or  any  of  the 
new  concerns,  and  the  Union  Bank  went  down  in  the  crisis 
of  1846.  The  Bank  of  Western  India  was  founded  in  Bom- 


1  J.  W.  Macl/ellan,  in  London  Bankers*  Magazine,  January,  1893, 


,  55- 
•I 


434          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

bay  in  1842,  opened  branches  in  Calcutta,  Ceylon,  and 
Canton,  and  became  the  Oriental  Bank  in  1845.  This  bank 
seems  to  have  inaugurated  the  business  of  circuitous  ex- 
change, and  encountered  the  unsuccessful  hostility  of  London 
houses  and  the  East  India  Company  when  it  sought  a  royal 
charter  in  1850. 

The  discovery  of  gold  in  Australia  led  to  the  projection 
in  London  of  many  new  banks  for  foreign  business,  but  it 
soon  appeared  that  there  was  already  a  sufficient  banking 
capital  invested  in  India.  The  Bank  of  Bombay  found 
legitimate  discount  business  so  dull  that  the  directors  en- 
deavored to  obtain  a  modification  of  their  charter  which 
would  permit  them  to  engage  in  exchange  business  in  and 
out  of  India.  The  directors  proposed,  if  this  were  granted, 
that  the  limit  of  note  issues  should  be  reduced  from  ,£2,000,- 
ooo  to  ,£1,000,000.  The  actual  circulation  was  only  ,£400,000, 
and  the  government  refused  to  assent  to  the  proposal. 

The  banks  of  the  three  great  presidency  towns  had  a  cir- 
culation in  1860  amounting  to  ,£2,241,471,  with  current  ac- 
counts of  only  ,£1,855,293.  The  circulation  increased  by  the 
spring  of  1861  to  ,£3,081,599,  of  which  ,£1,851, 627  was  issued 
by  the  Bank  of  Bengal,  ,£1, 006, 460  by  the  Bank  of  Bombay, 
and  ,£223, 5 12  by  the  Bank  of  Madras.  Each  bank  was  re- 
quired to  keep  in  its  vaults  cash  equal  to  one-fourth  of  all 
outstanding  demand  liabilities.  No  complaint  had  been 
made  up  to  this  time  of  the  manner  in  which  these  banks 
conducted  their  business,  but  it  was  thought  that  a  profit 
might  be  made  by  the  government  out  of  the  issue  of  notes.1 
The  proposition  to  take  the  power  of  issue  away  from  the 
banks  was  discussed  as  early  as  April  27,  1859,  in  a  despatch 
from  Lord  Canning,  and  was  embodied  into  law  in  1861. 
The  record  of  the  banks  was  less  creditable  after  the  loss  of 
the  power  of  note  issue.  The  Bank  of  Bombay,  which  had 
been  so  carefully  conducted  for  twenty  years  that  its  gross 
losses  were  computed  at  only  ,£2,500,  obtained  a  new  char- 
ter in  1863,  sweeping  away  most  of  the  restrictions  on  its 


1  London  Bankers*  Magazine,  April,  1893,  LV.,  548. 


BANKING  IN  AFRICA   AND    THE   EAST.  435 

operations  and  permitting  an  increase  of  the  capital  by  June, 
1864,  to  ,£2,090,000.  Another  crash  came  in  1866,  follow- 
ing the  news  of  the  failure  of  Overend,  Gurney,  and  Co.,  in 
London,  and  the  Bank  of  Bombay  lost  in  three  years  ,£2,046,- 
898,  and  was  compelled  to  wind  up.1  A  new  Bank  of  Bom- 
bay was  formed,  and  in  May,  1868,  the  liquidator  stated  that 
,£1,889,993  of  the  capital  of  the  old  bank  had  been  lost.  The 
great  presidency  banks  are  still  important  factors  in  the  finan- 
cial affairs  of  India  and  usually  hold  in  their  reserves  from 
3,000,000  to  4,000,000  rupees  in  government  notes.2 

The  power  to  issue  notes  was  withdrawn  from  the  three 
banks  by  Act  XIX.,  of  1861,  and  a  paper  currency  estab- 
lished under  government  supervision,  upon  substantially 
the  same  basis  as  that  of  the  issue  department  of  the  Bank 
of  England,  if  entirely  separated  from  the  banking  depart- 
ment. Some  changes  were  made  in  the  law  in  1893,  but 
they  were  principally  such  as  were  required  by  the  suspen- 
sion of  the  free  coinage  of  silver.  The  circulation  based 
upon  securities  is  80,000,000  rupees,  and  the  interest  upon 
these  securities,  which  amounted  to  3,452,284  for  the  year 
ending  March  31,  1895,  *s  covered  into  the  Indian  Treasury. 
The  remainder  of  the  circulation  is  represented  by  coin.  The 
average  gross  circulation  for  the  year  ending  March  31,  1863, 
was  44,194,385  rupees,  which  increased  in  1869  to  101,455,- 
327,  in  1873  to  128,640,267,  in  1879  to  131,905,084,  in  1883 
to  151,807,113,  in  1889  to  164,316,288,  in  1892  to  254,362,371, 
in  1893  to  270,995,630,  in  1894  to  282,915,237,  and  in  1895 
to  311,111,406  rupees.  A  considerable  proportion  of  these 
notes  is  held  in  the  treasury  offices  and  the  bank  reserves, 
so  that  the  average  circulation  in  the  hands  of  the  public  in 


1  J.  W.  MacLellan,  in  London  Bankers'  Magazine,  February,  1893, 
LV.,  223-24. 

8  The  amount  thus  held  on  March  31,  1895,  was  2,610,000  rupees, 
but  the  monthly  average  for  the  year  was  3,740,000  rupees. — Report 
from  Head  Commissioner  of  Paper  Currency,  Calcutta,  July  24,  1895. 
The  rupee  was  worth  about  forty-eight  cents  in  United  States  cur- 
rency when  silver  was  at  parity  with  gold,  but  it  is  now  worth 
about  twenty-two  cents. 


436          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

1895  is  calculated  by  the  head  commissioner  at  185,000,000 
rupees.  The  maximum  of  the  year  was  202,000,000  in  De- 
cember, 1894,  and  the  minimum  168,400,000  in  April,  1894. 
Redemptions,  including  those  accomplished  by  the  transfer 
of  notes  between  treasury  branches,  are  much  more  rapid 
than  for  the  paper  money  of  the  United  States,  having 
reached  1,002,336,925  rupees  during  1895,  or  more  than 
three  times  the  circulation.  The  new  currency  has  pos- 
sessed perfect  security  and  has  obviated  the  necessity  for 
large  transfers  of  silver  coin,  but  it  has  lacked  the  element 
of  elasticity  and  has  restricted  the  expansion  of  banking 
business  in  India.  The  total  liabilities  of  the  three  banks 
which  formerly  issued  notes  have  increased  in  no  such  pro- 
portions as  the  liabilities  of  banks  in  other  countries,  and 
interest  rates  in  India  have  averaged  much  higher  than  in 
countries  possessing  a  banking  currency.1 

The  suspension  of  free  coinage  in  India  in  1893*  was  au 
attempt  to  arrest  the  downward  course  of  the  silver  rupee 
by  giving  it  a  scarcity  value.  The  commission  which  con- 
sidered the  subject  recommended  that  an  exchange  rate  of 
one  shilling,  four  pence  (32  cents),  be  fixed  by  the  offering 
of  Council  bills,  sold  by  the  government  in  London,  at  that 
rate.  The  experience  of  the  Netherlands  and  the  Bank  of 
Java  in  thus  putting  an  arbitrary  gold  value  on  silver  token 
coins,  and  the  success  of  Austria-Hungary  and  Russia  in 
maintaining  their  credit  paper  and  silver  coins  above  the 
bullion  value  of  silver,  were  the  models  of  the  new  Indian 
policy.  The  policy  was  not  at  once  successful.  Rupee 
paper  would  not  bring  sixteen  pence  and  the  government  was 
eventually  compelled  to  sell  it  for  what  it  would  fetch.  The 
very  fact  that  the  government  succeeded  in  raising  the  value 
of  the  coined  rupee  somewhat  above  its  bullion  value  operated 
to  counteract  the  effects  of  this  success.  Silver  coins  began 
to  pour  out  of  private  hoards,  to  be  replaced  (if  replaced  at 
all)  by  silver  bars.  A  curious  proof  of  this, — and  a  pre- 
sumptive proof  that  the  silver  circulation  expanded  in  spite 

1  London  Bankers'  Magazine,  April,  1893,  LV.,  548. 

2  For  further  reference  to  this  subject,  see  Chapter  XXII. 


BANKING  IN  AFRICA   AND    THE   EAST.  437 

of  the  suspension  of  coinage, — is  afforded  by  the  fact  that 
coins  of  old  coinages  constituted  in  1895  a  considerably 
larger  proportion  of  the  amounts  received  at  government 
treasuries  than  in  former  years.  The  percentage  of  the 
coins  of  William  IV.  increased  from  1.47  per  cent,  of  the 
total  in  1894  to  1.54  in  1895  >  coins  of  1840,  first  issue,  from 
4.0  to  4.4  ;  second  issue,  from  10.99  to  Ii:-23  ;  and  other  issues 
up  to  1882,  with  few  exceptions,  showed  an  increase.1 

Banking  in  Japan. 

Japan,  after  experimenting  with  government  paper  money 
and  local  banks  issuing  notes  on  the  evidences  of  the  public 
debt,  has  adopted  the  system  of  a  single  great  bank  of  issue 
governed  by  regulations  similar  to  those  of  the  Imperial 
Bank  of  Germany.  Paper  money  was  in  use  in  Japan  for 
many  generations,  but  its  recent  history  dates  from  1867. 
That  year  was  marked  by  the  overthrow  of  the  feudal  sys- 
tem, which  had  long  prevailed  in  the  Empire,  and  the 
restoration  of  the  power  of  the  Mikado.  It  was  considered 
necessary  to  continue  the  circulation  of  the  existing  paper 
money  in  order  to  pay  the  indemnities  granted  to  the  feudal 
lords  for  the  surrender  of  their  privileges  and  their  land 
taxes.  A  new  form  of  paper,  bearing  the  traditional  emblems 
of  the  Empire,  was  adopted  and  acquired  a  more  general 
circulation  than  the  old.2 

The  local  banks  were  authorized  under  the  name  of 
national  banks  by  a  law  of  1872.  The  law  was  passed 
largely  to  prevent  the  fall  in  value  of  the  government  paper 
money,  and  the  redemption  of  the  paper  was  partially  pro- 
vided for  by  the  issue  of  government  stocks.  The  banks 
were  required  to  purchase  the  stocks  in  order  to  issue  circu- 
lating notes  and  were  at  first  required  to  redeem  their  notes 
on  demand  in  gold.  The  depreciation  of  silver  and  the 
excess  of  paper  caused  such  a  persistent  demand  for  the 

1  Mr.  F.  C.  Harrison,  in  Report  from   the  Head  Commissioner  of 
Paper  Currency,  Calcutta,  July  24,  1895,  39-42. 

2  G.  Boissonade,  Journal  des  Economistes,  Sept.,  1895,  410. 


438          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

conversion  of  the  notes  that  the  banks  were  authorized  in 

1876  to  redeem  in  government  paper  money.     The  capital 
of  these  banks  was  allowed  to  consist  of  any  form  of  govern- 
ment stock,  and  the  banks  were  required  to  place  this  stock 
in  the  custody  of  the  government,  receiving  80  per  cent,  of 
the  amount  in  paper  money.     There  was  almost  a  mania  for 
new  banks  between  1876  and  1879  and  the  number  in  opera- 
tion at  the  close  of  the  latter  year  was  153.     Paper  fell  in 

1877  forty  per  cent,  in  relation  to  silver  and  fifty  per  cent,  in 
relation  to  gold,  and  the  situation  was  made  worse  by  the 
issue  of  27,000,000  yen   in  government   notes  to   pay   the 
expenses  of  putting  down  the  rebellion  of  1877-78. 

A  new  effort  was  made  in  1878  to  bring  order  into  the  dis- 
ordered financial  system  by  the  suspension  of  further  issues 
of  paper,  the  issue  of  short-term  treasury  bonds  bearing  in- 
terest, exchangeable  for  government  notes,  and  the  issue  of 
long-term  bonds  bearing  interest  at  seven  per  cent,  and  paya- 
ble in  silver.  It  was  announced  that  the  redemption  of  a 
portion  of  these  bonds  annually  would  be  accompanied  by 
the  burning  of  an  equal  quantity  of  paper  money.  These 
measures  were  completely  successful.  The  breaking  down 
of  feudal  barriers  developed  the  domestic  commerce  of  the 
country  and  stimulated  a  production  which  found  an  outlet 
in  foreign  exports  and  brought  silver  pouring  into  Japan  in 
payment.  The  banks  bought  up  the  depreciated  paper 
money  so  rapidly,  in  order  to  exchange  it  for  bonds,  that  the 
issue  of  bonds  had  to  be  temporarily  suspended  to  prevent 
too  great  a  rarefication  of  the  circulating  medium.  A  mint 
was  opened,  specie  was  received  at  the  custom-houses  at  its 
current  value  in  paper,  and  in  less  than  seven  years  (in  1885) 
paper  was  within  five  or  six  per  cent,  of  par. 

The  new  policy  was  promoted  by  the  creation  in  1882  of 
the  Bank  of  Japan,  with  a  capital  of  20,000,000  silver  yen,1 


235.  The  gold  yen  is  worth  10.997  in  United  States  money, 
but  the  silver  yen,  containing  26.956  grammes  of  silver  nine-tenths 
fine,  is  worth  only  about  half  as  much  in  bullion,  owing  to  the  rapid 
depreciation  of  silver  in  recent  years.  Japan  is  now  on  the  silver 
basis. 


BANKING  IN  AFRICA    AND    THE  EAST.  439 

and  by  the  laws  of  1883  and  1884,  providing  for  the  gradual 
retirement  of  the  notes  of  the  local  banks  and  the  substitu- 
tion of  those  of  the  new  institution.  The  law  of  1884  pre- 
scribed the  rules  governing  the  circulation  of  the  Bank  of 
Japan  and  required  that  the  notes  be  convertible  into  silver 
on  demand.  The  bank  was  authorized  to  issue  notes  to  the 
amount  of  85,000,000  yen  without  a  specie  reserve  and  of 
this  sum  not  more  than  27,500,000  yen  were  to  be  issued  in 
place  of  internal  bank-notes  cancelled  after  1887.  A  leaf 
was  taken  from  the  German  law  in  the  provision  that  the 
government  might  permit  the  extension  of  the  limit  of  cir- 
culation in  case  of  need,  but  that  the  excess  of  circulation 
should  be  subject  to  a  tax  of  five  per  cent.  The  circula- 
tion not  covered  by  specie  is  required  to  be  covered  by  good 
commercial  paper  or  treasury  bonds.1  Circulation  may  be 
issued  beyond  the  authorized  limit  without  special  tax  when 
specie  is  held  for  the  full  amount  of  the  excess.  The  bank 
has  branches  at  Osaka  and  Shimonoseki  and  five  sub- 
branches.  The  circulation  is  about  150,000,000  yen. 

The  Act  of  1883,  which  regulated  the  retirement  of  the 
notes  of  the  local  banks,  required  them  to  surrender  the 
privilege  of  note  issue  at  the  expiration  of  the  term  of  twenty 
years  for  which  they  were  originally  chartered.  They  were 
required  to  create  a  fund  for  the  redemption  of  their  notes, 
from  monies  to  be  set  aside  annually  from  their  profits. 
This  fund  is  in  the  custody  of  the  Bank  of  Japan,  which 
employs  it  in  the  purchase  of  public  stocks  and  cancels  the 
notes  with  the  proceeds  of  the  interest  on  the  stocks!  The 
terms  of  the  local  banks  expire  between  1896  and  1899,  and 
the  government  in  1894  brought  in  a  bill  providing  that  the 
banks  should  cease,  on  the  expiration  of  their  privilege,  to 
be  banks  of  issue  and  that  outstanding  circulation  should  be 
redeemed  by  the  State.  The  bill  was  not  finally  acted  on 
and  the  local  banks  have  been  making  an  earnest  fight  for 
an  extension  for  ten  years  of  the  privilege  of  note  issue. 
The  government  is  still  seeking  the  suppression  of  local  is- 


1  Report  of  the  Director  of  the  Mint  for  1895,  367. 


440          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

sues,  upon  the  ground  that  it  gives  the  national  banks  an 
unfair  advantage  over  the  seven  hundred  private  banks  and 
retards  the  unification  of  the  currency.1 

Japan  originally  employed  both  gold  and  silver  money,  but 
was  driven  to  the  silver  standard  when  the  restoration  of 
specie  payments  was  attempted  in  1882  and  has  suffered  in- 
convenience by  the  great  difference  of  exchange  with  gold- 
using  countries.  There  has  been  much  discussion  of  the 
currency  problem  and  some  agitation  in  favor  of  the  gold 
standard.  A  commission  was  appointed  in  September,  1893, 
to  consider  the  existing  state  of  the  currency  and  the  best 
standard  for  Japanese  interests.  The  result  of  their  delibera- 
tions has  not  been  harmonious  and  only  individual  reports 
have  been  submitted  to  the  government.  The  theory  that 
a  high  premium  on  specie  stimulates  exportations,  and  that 
its  disappearance  removes  this  stimulus,  has  not  been  directly 
verified  in  the  case  of  Japan .  Exports  have  steadily  increased , 
in  spite  of  the  rise  in  value  of  the  paper  money  ;  but  this 
phenomenon  is  partially  explained  by  the  fact  that  the  rise 
of  paper  in  relation  to  silver  has  been  neutralized  by  the  fall 
of  silver  in  relation  to  gold,  which  has  left  the  paper  money 
in  something  like  its  old  relation  to  the  gold  standard  of 
other  countries.9 


1  Letter  of  Jiuchi  Soyeda,  in  Economic  Journal,  Dec.,  1894,  IV., 

735- 

2  For  another  case  of  the  failure  of  this  theory,  see  Ch.  XII.,  p.  279, 
tinder  The  Banks  of  Greece.    M.  Combes  de  Lestrade,  in  the  discus- 
sion before  the  Societe  d' Economic  Politique,  at  Paris,  Sept.  5,  1895, 
declared  that  Russia,  with  a  gold  reserve  adequate  for  the  restoration 
of  gold  payments,  allowed  the  paper  rouble  to  remain  below  par  in 
order  to  avoid  a  sudden  arrest  of  exportation. — Journal  des  Econo- 
mistes,  Sept.,  1895,  420.     The  effect  of  the  silver  standard  in  Japan, 
according  to  the  observation  of  Mr.  Soyeda,  who  is  in  the  best  posi- 
tion to  know  the  facts,  has  been  to  raise  domestic  prices  as  well  as  to 
increase  the  burden  of  gold  obligations  expressed  in  the  silver  stand- 
ard. He  says  :  "  The  prices  of  exportable  goods,  such  as  rice,  the  chief 
article  of  food,  have  risen  a  great  deal.     Thus  the  effect  of  the  de- 
preciation was  felt  not  only  in  the  external  trade,  but  also  in  the  in- 
ternal transactions." — Economic  Journal,  Dec.,  1894,  IV.,  732. 


BANKING  IN  AFRICA   AND    THE  EAST.  441 

Banking  in  China. 

The  bank-note  circulation  of  China  is  under  no  legal  regu- 
lation. The  Chinese  banks  of  issue  are  mainly  at  Peking 
and  issue  notes  as  low  as  ten  cents,  but  the  notes  rarely  cir- 
culate far  from  the  locality.  The  Peking  banks,  however, 
and  the  discount  banks  in  the  provinces,  which  perform  the 
functions  of  the  treasury  for  the  government,  stand  high  in 
the  public  estimation.  The  issue  of  paper  money  by  the 
government  took  place  as  far  back  as  five  hundred  years 
before  Christ,  but  was  suspended  in  1445  and  has  been  only 
once  resumed  for  a  brief  period.1  No  special  taxes  or  bur- 
dens are  imposed  upon  bankers  as  such,  but  they  are  ex- 
pected to  aid  the  government  by  loans  in  times  of  emergency. 
Several  branches  have  been  established  in  China  of  foreign 
banks,  some  of  which  issue  notes  in  Hongkong  which  have 
acquired  circulation  within  Chinese  jurisdiction. 

The  greatest  of  the  foreign  banks  is  the  Hongkong  and 
Shanghai  Banking  Corporation,  which  was  incorporated  in 
1864  with  a  capital  of  $2, 500,000. 2  The  bank  began  business 
in  1865,  with  several  merchants  of  Hongkong  among  its 
directors,  and  has  increased  its  capital  to  $10,000,000  and 
its  note  issues  to  $9,543,171.  The  report  of  the  directors 
for  the  half-year  ending  June  30,  1895,  showed  net  profits, 
including  a  small  balance  on  hand,  of  $1,248,802.  The  sum 
of  $492,140  of  this  profit  was  absorbed  by  the  difference  in 
exchange  between  China  and  the  gold-using  countries  where 
the  dividends  are  paid,  but  $444,444  was  awarded  in  dividends 
in  gold  and  $500,000  transferred  to  the  reserve  fund.  The- 
magnitude  of  the  business  of  the  bank  may  be  judged  by  the 
fact  that  its  liabilities  were  $167,128,037,  including  deposits 
of  $119,804,395  and  bills  payable  of  $20,766,669.  The  cash 
in  hand  and  in  transit  was  $51,390,449  ;  loans  and  discounts 
were  $47,650,726,  and  bills  receivable  were  $60,036,316. 

Several  other  English  and  East  Indian  banks  do  business 

1  Comptroller's  Report,  1895,  Letter  of  Minister   Charles   Denby, 

74-75- 

1  London  Bankers'  Magazine,  Feb.,  1893,  I/V.,  221. 


442          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

in  China,  but  it  was  only  in  the  closing  months  of  1895  that 
plans  were  perfected  for  a  Russo-Chinese  bank,  with  head- 
quarters at  St.  Petersburg.  The  bank  has  been  organized 
with  a  capital  of  6,000,000  roubles  ($4,600,000),  of  which 
more  than  half  has  been  subscribed  by  French  bankers. 
The  capital  is  said  to  be  furnished  by  the  same  syndicate 
which  effected  the  issue  of  the  Chinese  loan  guaranteed  by 
the  Russian  government  after  the  close  of  the  war  between 
China  and  Japan.  The  president  of  the  new  bank  is  Prince 
Ksperukhtomsky,  who  has  attained  some  prominence  in 
Russian  politics. 

The  Bank  of  Persia. 

The  Imperial  Bank  of  Persia  was  established  for  thirty 
years  by  a  group  of  English  capitalists  in  1889,  and  its  head 
office  is  in  London.  The  capital  of  the  bank  is  ,£650,000, 
with  authority  to  increase  to  ,£4,000,000,  and  the  metallic  re- 
serve is  required  to  be  at  least  one-third  of  the  amount  of  notes 
in  circulation.  The  excess  of  circulation  above  the  reserve 
is  not  allowed  to  exceed  the  amount  of  the  capital  actually  paid 
in.  The  reserve  may  consist  of  gold  or  silver,  but  the  charter 
provides  that  if  Persia  adopts  the  single  standard  of  gold 
or  silver,  three- fourths  of  the  reserve  shall  be  held  in  the  metal 
which  may  be  adopted  as  the  standard.  The  notes  constitute 
a  first  lien  upon  the  reserve  and  may  be  redeemed  at  the 
expense  of  reducing  the  reserve  below  the  legal  limit.1  The 
notes,  which  reached  ,£72,668  on  September  20,  1895,  are  get~ 
ting  into  general  circulation  in  Persia,  and  branches  of  the 
bank  have  been  established  at  Teheren,  Ispahan,  Tabiz, 
Meched,  Shivas,  Bushir,  Bagdad,  Basvah,  and  Bombay.  The 
bank  advanced  ,£500,000  to  the  Persian  government  in  1892, 
for  the  purpose  of  buying  back  the  tobacco  monopoly  from 
those  who  held  it,  and  was  accorded  the  guarantee  of  reim- 
bursement from  the  customs  duties.  The  dividends  paid  in 
1895  were  .£35,000,  notwithstanding  some  losses  during  the 
past  few  years  arising  from  the  depreciation  of  silver.2  The 

1  L£vy,  236. 
v  2  Revue  des  Banques,  Dec.,  1894,  XIII.,  253. 


BANKING  IN  AFRICA   AND    THE   EAST.  443 

aggregate  assets  on  September  20,  1895,  were  ,£1,402,694,  of 
which  ,£141,986  was  in  cash  and  ,£799,726  in  loans  and  dis- 
counts. The  deposits  were  ^"239,164. 

The  Banking  System  of  Australia. 

The  banking  system  of  Australia  was  organized  in  some 
respects  like  the  Scottish  system  prior  to  the  crisis  of  1893, 
but  was  not  managed  with  the  conservatism  and  good  judg- 
ment which  have  been  the  characteristics  of  Scotch  bank- 
ing. The  difficulties  developed  in  the  crisis  of  1893, 
were  not,  however,  the  result  of  any  excess  of  note  issues, 
but  of  the  error  common  in  new  countries, — excessive  specu- 
lation in  land  and  the  locking  up  of  assets  in  investments 
which  did  not  prove  immediately  productive.  The  original 
Bank  Act  of  Victoria,  passed  in  1864,  was  general  in  its  pro- 
visions, required  no  independent  audit  of  bank  accounts, 
and  imposed  no  definite  limit  upon  note  issues.  The  demand 
for  funds  for  speculation  in  land  led  to  heavy  loans  to  the 
speculators,  but  some  of  the  shrewder  bankers  evidently 
doubted  their  legality  and  secured  in  1888  an  important 
amendment  of  the  banking  law.  A  commission  was  ap- 
pointed, with  the  avowed  purpose  of  revising  the  law,  and  the 
act  which  resulted  from  their  deliberations  purported  to 
impose  new  safeguards  by  requiring  a  paid-up  capital  of 
,£125,000  for  banks  issuing  notes  and  by  making  the  notes  a 
first  charge  upon  the  assets.1  These  reforms,  however,  were 
apparently  only  the  cloak  for  the  new  provision  that,  ' '  Any 
incorporated  banking  company  may,  notwithstanding  any- 
thing to  the  contrary  contained  in  any  act  in  force  in  the 
Colony  of  Victoria  relating  to  such  banks,  advance  or  lend 
money  on  the  security  of  lands,  houses,  ships,  or  pledges  of 
merchandise. ' ' 

Banking   in   Australia  had  been   carried   to  its  extreme 


1  Mr.  MacFie,  London  Bankers'  Magazine,  January,  1892,  LIII., 
68,  69.  Notes  constituted  an  unlimited  liability  in  Queensland,  and 
by  the.  Act  of  1874  in  New  South  Wales. — London  Bankers*  Magazine, 
August,  1894,  LVIII.,  154. 


444          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

limits,  and  millions  of  English  and  Scotch  capital  were  at- 
tracted to  the  country  by  its  rapid  development  and  by  the 
fact  that  the  people  were  of  the  same  blood  and  presumably 
of  the  same  temper  in  business  matters  as  the  lenders.  The 
banks  of  Victoria  alone  increased  their  aggregate  liabilities 
from  ^"19,488,512  in  1880,  to  ^42,224,084  in  1890,  while  the 
aggregate  assets  increased  from  ^"23,284,822,  including  ^3,- 
408,961  in  coin,  to  ^60,937,955,  including  .£6,868,328  in 
coin.1  The  proof  of  the  activity  and  of  the  risks  assumed 
in  Australian  banking  is  afforded  by  the  proportion  between 
available  deposits  and  the  discounts  and  advances  made  just 
before  the  crisis  of  1893.  The  following  table  shows  how 
the  Australian  banks  loaned  "up  to  the  hilt  "  in  comparison 
with  the  more  conservative  English  banks  :  * 


DEPOSITS. 

DISCOUNTS  AND  ADVANCES. 

London  Joint  Stock  Banks  .  . 
English  Provincial  Banks.  ... 
Australian  Banks  

^232,332,633 

62,272,817 

I4Q  4.OO  ^2Q 

;£l4S,942,304 
46,856,402 

TCJ.  Cj.7  ^7o 

The  proof  that  the  evils  which  carried  down  fourteen  great 
banks  and  closed  several  hundred  branches  in  the  spring  of 
l893>  grew  purely  out  of  bad  banking,  and  had  substantially 
no  connection  with  the  note  issues,  is  afforded  by  the  com- 
paratively small  figures  of  the  circulation.  The  banks  of 
Victoria  increased  their  note  circulation  only  from  ,£1,236,- 
046,  in  1880,  to  ,£1,543,340  in  1890,  and  in  1893  it  wa$ 
substantially  the  same.  The  chief  medium  of  circulation 
in  Australia  was  gold,  and  the  Australian  people  were  so 
well  accustomed  to  British  methods  of  the  use  of  credit  that 
the  absence  or  presence  of  the  power  of  note  issue  would 
probably  have  made  little  difference  in  the  crisis  of  1893. 
The  inflation  of  credit  and  the  crisis  occurred  without  any 
great  expansion  of  note  issues,  and  if  the  habits  of  the  people 
had  required  a  concurrent  expansion  it  would  have  been 

1  London  Bankers'  Magazine,  April,  1892,  LIIL,  580. 

2  London  Bankers'  Magazine,  January,  1893,  LV.,  46. 


BANKING  IN  AFRICA  AND    THE    EAST.  445 

only  an  incident  of  the  deeper  causes  of  the  crash.     As  M. 
Levy  sums  up  the  situation  :  1 

It  is  worth  remarking  that  the  Australian  crisis  was  not  due  to  an 
excess  of  issues  of  bank-notes,  whose  figures,  on  the  contrary,  have 
never  ceased  to  restrain  themselves  within  reasonable  limits,  but  to 
the  large  lock-ups  upon  mortgage  advances  which  could  not  be 
repaid,  which  left  the  banks  without  the  liquid  resources  necessary  to 
satisfy  their  depositors. 

The  discredit  thrown  upon  the  notes  of  suspended  banks 
by  the  crisis  of  1893,  and  the  pressure  for  currency  which 
usually  accompanies  the  disappearance  of  credit,  led  to  a 
temporary  issue  of  government  notes  in  New  South  Wales 
and  to  some  modifications  of  the  banking  law.  The 
principal  change  affecting  the  bank-note  circulation  was 
the  adoption  of  the  provision,  enacted  in  Victoria  in  1888, 
making  the  notes  of  a  failed  bank  a  first  charge  on  the 
assets.  Bank-notes  were  made  a  legal  tender  except  at  the 
bank,  as  in  the  case  of  the  notes  of  the  Bank  of  England, 
and  the  amount  in  circulation,  in  excess  of  the  coin  reserve, 
was  not  permitted  to  exceed  one-third  of  the  capital,  nor  to 
exceed  in  any  case  ,£2,000,000. 

The  future  of  Australian  banking  is  by  no  means  free 
from  storm-clouds.  The  banks  adopted  plans  of  reconstruc- 
tion after  the  crisis  of  1893,  which  involved  the  change  of 
demand  and  time  deposits  into  deferred  liabilities  with  in- 
terest in  most  cases  at  four  and  a  half  per  cent.  This  plan 
afforded  a  breathing  spell,  and  the  principal  of  these  deposits 
does  not  become  due  in  any  considerable  amount  until  1898. 
The  payments  required  in  that  year,  are  ^"10,605,772  ;  in 
1899,  ^"10,873,620;  in  1900,  ;£i2, 258, 320;  and  in  1901,  /"8,- 
390,508.'  It  is  already  becoming  a  serious  question  how  this 
immense  mass  of  liability  is  to  be  met,  for  it  is  evident  that, 
unless  there  is  a  marked  change  in  feeling  among  investors 
in  England  and  Scotland,  the  principal  due  there  will  nearly 
all  be  withdrawn.  This  probability  presents  as  serious  a 

1  Melanges  Financiers,  299. 

2Ivondon  Bankers'  Magazine,  June,  1894,  LVIL,  869. 


446          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

problem  as  that  which  has  confronted  the  United  States 
during  the  long  period  of  the  withdrawal  of  foreign  capital 
which  followed  the  passage  of  the  silver  purchase  law  of 
1890.  It  is  indeed,  from  a  mathematical  standpoint,  much 
more  serious  in  the  case  of  Australia,  for  the  amount  of 
liability  to  Kurope  is  computed  at  ^20,000,000,  or  at  the 
rate  of  £16  per  head  for  the  Australian  population.1  If  this 
withdrawal  of  capital  actually  takes  place,  it  means  the 
crippling  of  many  Australian  industries,  the  forced  sale  of 
land  and  other  assets  held  by  the  banks,  and  the  impairment 
of  their  power  to  pay.  The  prolonged  payment  of  interest 
in  itself  on  such  a  mass  of  liability  means  high  rates  for 
money  on  commercial  loans  and  to  that  extent  a  tax  upon 
the  productive  power  of  the  colonies.  The  fact  that  these 
burdens  are  proving  heavy  is  indicated  by  the  second  sus- 
pension, on  July  17,  1895,  of  the  City  of  Melbourne  Bank, 
with  liabilities  of  nearly  ,£4,000,000.  The  bank  first  sus- 
pended on  May  17,  1893,  and  reopened  on  July  igth  follow- 
ing, but  it  was  declared  by  the  directors  in  a  report  of  March 
31,  1895,  that  the  high  rate  of  interest  on  deposit  receipts 
could  not  be  maintained.  If  the  remaining  banks  meet 
their  heavy  obligations  more  successfully,  it  will  be  because 
of  the  great  recuperative  power  of  the  colonies,  the  return 
of  confidence  among  foreign  investors,  and  the  effect  of  high 
discount  rates  in  attracting  and  holding  foreign  money. 

The  Bank  of  Java. 

The  bank-note  circulation  of  the  Dutch  East  Indies,  of 
which  the  Island  of  Java  forms  the  most  important  part,  is 
furnished  by  the  Bank  of  Java.  The  bank  was  founded  in 
1828,  with  a  capital  of  6,000,000  florins  ($2,400,000),*  but 
the  chief  interest  of  its  history  to  the  Western  World  is  the 
success  with  which  it  has  maintained  the  gold  standard  in 
Java  since  the  suspension  of  free  coinage  in  Holland  in  1875. 
The  situation  in  Java  has  been  in  many  respects  the  same 

1  London  Bankers'  Magazine,  Dec.,  1894,  I, VIII.,  741. 

2  Muhleman,  126. 


BANKING  IN  AFRICA    AND    THE   EAST.  447 

as  in  the  mother  country,  but  the  experiment  is  one  which 
might  have  seemed  more  precarious  because  of  the  situation 
of  Java  in  the  midst  of  silver  standard  countries  and  the 
almost  entire  absence  of  gold  in  the  reserves  of  the  bank. 
Silver  was  for  many  years  the  legal  standard  of  Java,  but 
the  government  of  Dutch  India  continued  for  a  considerable 
time,  beginning  in  1818,  to  make  the  bulk  of  its  payments 
in  copper.  This  resulted  in  driving  silver  from  circulation 
and  led  to  the  introduction  of  paper  currency  to  represent 
the  copper  coins. '  In  1875  the  Bank  of  Java  was  empowered 
to  regulate  its  operations  according  to  the  principles  on 
which  the  Bank  of  Holland  was  working.  A  bill  was 
brought  forward  and  passed  in  1877,  by  the  Dutch  Ministrj-, 
for  the  regulation  of  the  currency  of  their  Indian  possessions. 
The  principal  features  of  this  bill  were  the  establishment  of 
the  double  standard  on  the  same  basis  as  in  Holland, — the 
formal  suspension  of  the  further  coinage  of  silver. 

The  parity  of  the  notes  of  the  Bank  of  Java  and  of  the 
silver  coins  is  maintained  through  the  foreign  exchanges. 
All  commercial  operations  with  Holland  or  other  countries 
in  Europe  are  settled  by  bills  drawn  on  Amsterdam  or  Lon- 
don, and  the  exchange  has  shown  an  extreme  fluctuation 
never  greater  than  five  and  a  quarter  per  cent,  on  Amster- 
dam and  six  per  cent,  on  London.  Since  1885  the  fluctua- 
tion has  not  been  greater  than  three  per  cent.  The  bank 
rate  has  varied  from  nine  per  cent,  for  a  time  in  1876  to  as 
low  a  rate  as  four  per  cent,  in  1878  and  in  1886.  The  mean 
rate  in  1894  was  5.28  per  cent.2  Settlements  for  merchan- 
dise balances  between  Holland  and  Java  are  made  by  ship- 
ments of  silver.  These  shipments  are  taken  up  at  home  by 
the  Bank  of  the  Netherlands  against  bank-notes  or  credits  at 
par  with  gold.3  There  was  an  industrial  crisis  in  Java  in 
1886,  which  was  attributed  in  some  quarters  to  the  mainte- 
nance of  the  gold  standard  of  wages  and  prices,  but  the 

1  London  Bankers'  Magazine,  March,  1893,  I/V.,  383-91. 

2  L'Economiste  Europeen,  Nov.  9,  1895,  VIII.,  581. 

3  Letter  from  Mr.  Van  den  Berg,  Report  of  the  Indian  Currency 
Committee,  Sen.  Misc.  Doc.  23,  Fifty-third  Cong.,  ist  Sess.,  573. 


448          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

planters  adopted  improved  methods  of  production  and  re- 
cent years  have  been  years  of  prosperity.  The  majority  of 
Dutch  and  English  observers  have  been  disposed  to  regard 
the  fixed  par  of  exchange  maintained  with  gold  standard 
countries  as  more  advantageous  to  the  island  under  actual 
conditions  of  production  than  the  possible  benefits  of  the 
declining  cost  of  production  in  gold  obtained  in  silver  stand- 
ard countries  by  the  comparatively  slow  rise  in  wages,  rents, 
and  raw  materials.  The  actual  gold  holdings  of  the  Bank 
of  Java  seldom  exceed  6,000,000  florins  ($2,400,000)  l  against 
a  note  circulation  of  45,000,000  florins  ($18,000,000),  and 
gold  is  seldom  seen  in  general  circulation.  The  smaller 
currency  consists  of  silver  coined  in  Holland  and  the  larger 
of  the  notes  of  the  bank. 

The  Banks  of  South  Africa. 

The  strongest  banks  of  South  Africa  are  mostly  English 
institutions,  with  their  head  offices  in  London.  The  Cape 
Government  passed  an  act  in  1891,  requiring  the  withdrawal 
of  circulating  notes  then  outstanding  and  the  deposit  of  se- 
curities with  the  Treasurer-General  to  cover  future  issues. 
The  only  securities  accepted  were  those  of  the  Cape  Govern- 
ment, which  tends  to  justify  the  belief  that  the  law  was  sug- 
gested by  the  necessity  for  placing  the  securities  rather 
than  the  benefit  of  the  banking  system.  The  notes  circu- 
late over  a  wide  area  and  no  provision  is  made  for  any  spe- 
cific coin  reserve.2  The  note  issues  of  the  great  English 
banks  are  so  overshadowed,  however,  by  their  discount  and 
exchange  business  that  the  regulations  on  the  subject  are 
of  minor  importance.  The  development  of  the  gold  mines 
furnishes  a  metallic  circulating  medium  of  magnitude,  and 
British  methods  of  banking  by  transfers  of  credit  are  rapidly 
making  headway  into  the  interior  of  Africa.  The  unusual 
stimulus  given  to  business  in  South  Africa  during  the  past 
few  years  by  the  great  gold  discoveries  has  afforded  the 

1  Levy,  297. 

2  London  Bankers'  Magazine,  Jan.,  1892,  LIU.,  100-101. 


BANKING  IN  AFRICA   AND    THE   EAST.  449 

banks  large  profits,  and  has  led  in  one  case  to  an  increase 
of  capital  and  in  another  case  to  a  proposed  increase  of 
note  issues  ;  but  the  latter  increase  will  carry  the  note  issues 
of  the  bank  hardly  above  ten  per  cent,  of  the  aggregate  lia- 
bilities. 

The  Standard  Bank  of  South  Africa  is  the  largest  of  the 
English  banks,  with  a  paid-up  capital  of  ,£1,000,000.  The 
note  circulation  on  June  30,  1895,  was  ;£73°>389,  but  the 
aggregate  liabilities  were  ,£15,873,509.  It  was  announced 
at  the  annual  meeting,  on  October  8,  1895,  that  taking  the 
five  items  on  the  other  side,  of  cash,  deposits  with  bankers, 
native,  gold  investments,  and  bills  bought,  they  held  in 
liquid  assets  and  readily  available  securities  ,£10,673,430,  or 
more  than  eighty-four  per  cent,  of  the  indebtedness.  The 
dividend  and  bonus  paid  for  the  year  was  sixteen  per  cent. l 
The  Bank  of  Africa,  which  had  liabilities  on  June  30,  1895, 
of  ,£4,683,249,  authorized  an  increase  of  its  paid-up  capital, 
at  the  annual  meeting  on  September  25,  1895,  from  ^250,000 
to  ,£525,000.  The  note  circulation  on  June  30,  1895,  was 
^£151, 495,  and  the  cash  held  was  ,£1, 026, 919. a  The  bank 
which  has  proposed  an  increase  of  note  issues  is  the  African 
Banking  Corporation,  which  has  a  paid-up  capital  of 
,£297,645.  The  total  liabilities  on  September  30,  1895,  were 
,£3,843,147,  but  the  circulation  was  only  ,£33,870,  with  a  cash 
reserve  of  ,£1,382,037,  and  the  proposed  increase  in  circulation 
is  only  ,£250,000,  for  the  purpose  of  extending  branches  in 
Rhodesia,  Natal,  and  the  Transvaal.3 

The  National  Bank  of  the  South  African  Republic,  situ- 
ated at  Pretoria,  was  founded  in  1891,  with  a  capital  of 
,£502,000.  The  bank  showed  profits  in  1893  of  ,£42,000,  but 
the  larger  portion  (.£35,000)  was  transferred  to  a  special 
reserve  fund,  to  cover  possible  losses  on  securities  reverting 
to  the  bank  by  the  default  of  borrowers  upon  them.4  The 
circulation  is  about  ,£130,000  and  is  covered  many  times  by 

1  London  Bankers1  Magazine,  Nov.,  1895,  LX.,  656. 

2  London  Bankers*  Magazine,  Nov.,  1895,  LX.,  637. 

3  London  Bankers'  Magazine,  Nov.,  1895,  LX.,  661. 

4  Revue  des  Banques,  June,  1894,  XIII.,  128. 

aq 


450          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

the  coin  reserve.     The  aggregate  liabilities  in  1894  were 
£2,281,472. 

The  Orange  River  Free  State  has  a  national  bank  with  a 
capital  of  ,£100,000  and  a  circulation  of  less  than  ,£400,000,. 
against  a  cash  reserve  of  about  ^600, ooo.1 

The  Colonial  Banks  of  European  Countries. 

The  bank-note  circulation  of  the  French  colonies  in  Asia 
is  controlled  by  the  Bank  of  Indo-China,  which  was  estab- 
lished by  the  decree  of  January  21,  1875,  subsequently 
modified  by  the  decree  of  February  20,  1888.  The  capital 
of  the  bank  is  12,000,000  francs  ($2,400,000),  and  its  privi- 
lege runs  until  January  21,  1905.  It  is  authorized  to  do  the 
business  of  a  bank  of  issue,  loans,  and  discounts  for  Cochin- 
China,  French  India,  and  New  Caledonia,  as  well  as  for  the 
protectorate  of  Cambodia,  Annam,  and  Tonkin.  There  are 
branches  in  China  and  Japan,  at  Pondicherry  in  India,  and 
in  various  other  parts  of  Asia  and  Oceanica.  The  note 
issues  are  not  permitted  to  exceed  three  times  the  metallic 
reserve  and  the  liabilities  on  account  of  notes,  deposit  ac- 
counts, and  other  debts  are  not  permitted  to  exceed  three 
times  the  capital  and  reserve,  unless  the  excess  is  fully 
covered  by  coin.  The  bank  is  obliged  to  deal  in  several 
different  forms  of  money  to  meet  the  tastes  of  its  various 
customers.  Mexican  dollars  have  been  coined  at  the  Paris 
mint,  rupees  are  used  at  Pondicherry,  and  francs  are  used  in 
keeping  the  accounts  of  the  bank  and  in  parts  of  its  terri- 
tory.3 The  larger  proportion  of  the  money  issued  through 
the  bank  has  consisted  of  piasters,  which  correspond  to  the 
trade  dollar  of  420  grains,  formerly  issued  by  the  United 
States,  but  efforts  are  being  made  to  put  the  French  franc 
into  circulation  as  the  monetary  unit.  The  note  circulation 
of  the  bank  of  Indo-China  at  the  close  of  1894  was  22,482,000 
francs  ($4,400,000),  the  cash  reserve  was  9,080,000  francs, 


1  Levy,  246. 

2  Le"vy,  231. 


BANKING  IN  AFRICA   AND    THE  EAST.  451 

the  deposits  were  8,577,000  francs  and  the  loans  were  19,- 
415,000  francs.1 

The  circulation  of  Algeria  is  furnished  by  the  Bank  of 
Algeria,  which  was  given  the  exclusive  privilege  of  note 
issue  by  the  Act  of  August  4,  1851.  The  privilege  was 
originally  granted  for  twenty  years,  but  was  extended  by 
various  decrees  until  November  i,  1897.  The  capital  of  the 
bank  was  originally  3,000,000  francs,  but  is  now  20,000,000 
francs.  The  notes  are  legal  tender  at  public  depositaries 
and  by  individuals.  The  cash  reserve  is  not  permitted  to  be 
less  than  one-third  of  the  amount  of  the  notes  and  current 
accounts.  The  capital  of  the  bank  is  invested  in  French 
public  securities  and  the  director  is  appointed  by  the  Presi- 
dent of  the  Republic  upon  the  nomination  of  the  Minister  of 
Finance.  A  limit  of  circulation,  to  the  amount  of  18,000,- 
ooo  francs,  was  fixed  by  the  law  of  August  12,  1870,  which 
suspended  specie  payments  for  Algeria  as  well  as  for  the 
Bank  of  France,  but  the  maximum  circulation  was  three 
times  increased  until  it  was  fixed  by  the  law  of  March  26, 
1872,  at  48,000,000  francs.  The  resumption  of  specie  pay- 
ments was  followed  by  the  law  of  April  3,  1880,  which  abol- 
ished a  fixed  limit  and  left  the  circulation  to  be  governed  by 
the  law  of  1851. 2 

The  Bank  of  Senegal  began  business  August  4,  1855, 
under  the  general  conditions  of  the  law  of  April  30,  1849. 
The  cash  reserve  is  required  to  equal  one-third  of  the  notes 
in  circulation,  and  the  circulation,  the  current  accounts,  and 
other  liabilities  are  not  allowed  to  exceed  three  times  the 
capital,  unless  the  additional  liability  is  represented  in  full 
by  a  corresponding  increase  of  the  metallic  reserve.  The 
bank  is  subject  to  the  supervision  of  the  Minister  for  the 
Colonies  at  Paris,  like  the  colonial  banks  of  Latin  America, 
and  conducts  business  through  the  same  Parisian  agency. 
The  capital  of  the  Bank  of  Senegal  is  600,000  francs  and  the 
circulation  is  about  1,000,000  francs,  with  a  metallic  reserve 


1  Muhleman,  97. 

2  Courtois,  197. 


452          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

of  750,000  francs.  The  aggregate  operations  in  1894  were 
5,093,594  francs  in  loans  and  discounts  and  6,996,075  francs 
in  exchange  operations,  and  the  dividend  paid  was  thirteen 
and  a  half  per  cent. ' 

The  Bank  of  Reunion  was  founded  July  4,  1853,  and  has 
a  capital  of  4,000,000  francs.  The  circulation  is  about  8,000,  - 
ooo  francs  and  is  governed  by  the  conditions  of  the  French 
law  of  1849.  The  Bank  of  Reunion  showed  a  considerable 
loss  in  loans  and  discounts  during  1894,  but  an  increase  in 
exchange  operations.  The  losses  of  the  bank  were  chiefly 
through  a  banking  company  which  was  one  of  its  principal 
clients,  and  a  subsidy  of  8,000,000  francs  was  voted  by  the 
local  government  in  order  to  save  an  institution  considered 
indispensable  to  the  existence  of  the  colony.  The  metallic 
reserve  fell  487,606  francs  below  the  legal  reguirements  on 
June  30,  1894,  and  the  bank  has  been  again  threatened  with 
difficulties  by  the  acute  competition  in  France  of  the  tapioca 
crop  of  Singapore,  which  enjoys  the  advantage  of  the  dif- 
ference in  exchange  between  silver  and  gold  using  countries. 
Reunion  is  on  the  gold  basis,  while  Singapore  pays  wages 
and  other  costs  of  production  in  silver  and  sells  in  gold 
markets  at  an  enhanced  profit.  The  bankers  and  planters 
of  Reunion  have  recently  asked  the  imposition  of  a  heavy 
tariff  in  France  on  tapioca  from  other  than  French  colonies, 
in  order  to  hold  the  French  market.2 

The  Portuguese  colonies  in  Africa  are  provided  with  cir- 
culation by  the  Ultramarine  Bank  {Banco  Ultramarine], 
which  has  its  principal  offices  at  Lisbon  and  was  founded  in 
1864.  The  notes  of  the  bank  circulate  at  Cape  Verd  and  in 
Portuguese  Guinea.  The  Philippine  Islands  are  served  by 
the  Spanish  Bank  of  the  Philippines  {Banco  Espagnol  Fili- 
pino], with  a  capital  of  600,000  pesetas  and  a  circulation  of 
about  twice  this  amount.3 


1  Revue  des  Banques,  Aug.,  1895,- XIV.,  136. 

2  D  Economists  Europ&en,  Nov.  9,  1895,  VIII.,  580. 

,  287. 


CHAPTER  XIX. 

CRISES  AND  THEIR  CAUSES. 

The  Recurrence  of  Crises  at  Regular  Intervals  Due  to  General  Causes 
— The  Operation  of  a  Credit  Cycle  upon  Production,  upon  Loan- 
able Capital,  and  upon  the  Accounts  of  the  Banks — The  Effect  of 
Overproduction  and  of  Machinery— Influence  of  a  Crisis  upon  the 
Distribution  of  Wealth— Bank-Notes  a  Small  Factor  in  Inflation 
of  Credit. 

AN  economic  crisis  is  the  sudden  arrest  of  commercial 
activity  and  the  collapse  of  credit.  Such  crises  have 
been  an  important  phase  of  modern  industrial  devel- 
opment and  have  been  essentially  periodic  in  their  recur- 
rence.1 Particular  events  in  nature  and  political  history 
have  been  sought  as  the  explanation  of  economic  crises,  and 
these  events  have  not  been  without  their  influence  ;  but  the 
conditions  which  have  produced  crises  have  been  of  a  more 
universal  character  and  are  intimately  interwoven  with  the 
structure  of  modern  credit  and  the  speculative  tendencies  of 
the  human  mind.  A  period  of  speculation  and  expansion, 

1  A  distinction  is  sometimes  made  between  financial  and  commercial 
crises,  according  to  their  particular  phenomena  or  the  causes  which 
bring  them  about.  A  panic  often  occurs  in  the  money  market  or  on 
the  stock  exchange,  as  the  result  of  a  great  failure,  a  political  event, 
or  a  mere  rumor.  Such  events,  where  they  produce  no  effect  upon 
the  general  movement  of  affairs,  may  be  described  as  financial  or 
purely  monetary  crises,  if  they  are  worth  dignifying  with  any  special 
designation  ;  but  those  here  treated  are  those  which  affect  the  whole 
economic  development  of  the  community,  because  they  are  the  result 
of  a  long  train  of  events  and  usually  involve  elements  both  financial 
and  commercial. 

453 


454          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

followed  by  a  sudden  arrest  of  the  expansive  movement  and 
a  collapse  of  credit,  complete  a  credit  cycle  and  produce  the 
conditions  for  the  beginning  of  a  new  cycle  within  substan- 
tially the  same  orbit  as  the  old.  In  tracing  the  movements 
of  credit  through  a  completed  cycle,  it  is  proper  to  begin 
during  the  period  of  quiescence  and  distrust  which  follows  a 
crisis.  At  such  times  the  capital  which  has  survived  the 
crisis  accumulates  in  the  banks,  where  it  lies  largely  idle, 
partly  because  the  arrest  of  business  activity  has  curtailed 
the  demand  for  capital  and  partly  because  safety  is  preferred 
to  profit,  for  the  time  being,  by  the  owners  of  capital. 

The  seeds  of  a  new  crisis  are  sown  in  three  ways, — in  the 
production  of  merchandise,  in  the  excessive  consumption 
which  apparent  prosperity  brings,  and  in  the  effect  of  pro- 
duction and  consumption  upon  loanable  capital.  The  effect 
of  reviving  industry  upon  production  is  a  rise  of  prices. 
The  markets  have  gradually  become  barren  of  commodities 
as  the  result  of  the  arrest  of  production  following  the  panic. 
The  demand,  which  was  less  than  the  supply,  suddenly  con- 
fronts a  supply  which  is  insufficient.  Prices  rise,  mill- 
wheels  and  factories  are  set  in  motion,  the  demand  for  the 
essentials  of  life  increases  the  purchasing  power  of  their 
producers,  and  their  demand  sets  in  motion  again  the  pro- 
duction of  luxuries  or  less  essential  articles.  The  movement 
of  revival  is  thus  diffused  by  degrees  through  the  whole 
community.  Prices  pursue  a  constantly  ascending  scale,  as 
the  demand  from  all  quarters  increases,  and  the  restoration 
of  business  prosperity  becomes  an  accomplished  and  com- 
pleted fact.  The  effect  of  the  upward  movement  in  stimu- 
lating a  speculative  advance  in  prices  is  well  described  by 
Mr.  John  Stuart  Mill  in  his  chapter  on  "The  Influence  of 
Credit  on  Prices. ' '  He  says  : 

The  inclination  of  the  mercantile  public  to  increase  their  demand 
for  commodities  by  making  use  of  all  or  much  of  their  credit  as  a 
purchasing  power,  depends  on  th'eir  expectation  of  profit.  When 
there  is  a  general  impression  that  the  price  of  some  commodity  is 
likely  to  rise,  from  an  extra  demand,  a  short  crop,  obstructions  to 
importation,  or  any  other  cause,  there  is  a  disposition  among  dealers 


CRISES   AND    THEIR   CAUSES.  455 

to  increase  their  stocks,  in  order  to  profit  by  the  expected  rise.  This 
disposition  tends  in  itself  to  produce  the  effect  which  it  looks  forward 
to,  a  rise  of  price  :  and  if  the  rise  is  considerable  and  progressive, 
other  speculators  are  attracted,  who,  so  long  as  the  price  has  not 
begun  to  fall,  are  willing  to  believe  that  it  will  continue  rising. 
These,  by  further  purchases,  produce  a  further  advance  :  and  thus  a 
rise  of  price  for  which  there  were  originally  some  rational  grounds,  is 
often  heightened  by  merely  speculative  purchases,  until  it  greatly 
exceeds  what  the  original  grounds  will  justify.  After  a  time  this 
begins  to  be  perceived ;  the  price  ceases  to  rise,  and  the  holders, 
thinking  it  time  to  realize  their  gains,  are  anxious  to  sell.  Then  the 
price  begins  to  decline  :  the  holders  rush  into  market  to  avoid  a  still 
greater  loss,  and,  few  being  willing  to  buy  in  a  falling  market,  the 
price  falls  much  more  suddenly  than  it  rose.1 

This  revival  of  industry  gradually  affects  the  character  of 
consumption  as  well  as  of  production .  Those  who  prac- 
ticed economies,  and  lived  closely  within  their  incomes 
through  the  period  of  depression,  begin  planning  their  mode 
of  living  upon  the  basis  of  future  profits  as  well  as  within 
their  actually  increased  earnings.  Houses  are  planned, 
carriages  and  servants  are  employed,  and  other  luxuries  are 
used,  which  would  not  be  used  but  for  the  belief  in  con- 
stantly growing  earnings  and  profits.  People  live  beyond 
their  incomes  and  consume  the  product  of  other  people's 
labor  and  of  their  own  savings.  It  is  this  which  makes  a 
community  so  poor  when  the  cycle  has  run  its  course.  There 
is  no  better  established  law  of  political  economy  than  that 
the  means  of  employing  labor  in  the  future  are  the  product 
of  past  savings.  When  these  savings  have  been  dissipated 
in  luxuriant  living,  there  is  no  adequate  capital  left  to  em- 
ploy labor  or  to  continue  the  old  scale  of  expenditure.  As 
Prof.  Bonamy  Price  remarks,  "  If  all  England  took  to  eat- 
ing and  drinking  up  and  consuming  everything  in  the  land 
in  one  year,  the  abundance  and  luxury  and  enjoyment  of 
riches  would  be  what  the  world  had  never  seen."  *  But  it 
could  not  last.  Those  who  have  been  spending  more  capital 
than  they  have  been  really  earning  go  into  bankruptcy  and 

1  Principles  of  Political  Economy,  B.  III.,  Ch.  xii.,  Sec.  3. 

2  Currency  and  Banking,  147. 


HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

the  loss  falls  upon  those  who  have  advanced  them  their  own 
capital  in  the  form  of  horses,  carriages,  wines,  woollens,  silks, 
and  houses.  The  suspension  of  the  production  which  sup- 
plied these  people  with  luxuries  would  in  itself  diminish  the 
present  demand  for  labor  and  change  the  course  of  indus- 
trial development.  When  the  mere  cessation  of  demand  is 
accompanied  by  inability  to  pay  for  what  has  been  consumed, 
the  situation  becomes  even  worse.  The  business  community 
wake  up  to  the  fact  that  they  have  consumed  the  savings  of 
past  years,  that  production  to  meet  this  fictitious  demand 
must  cease,  and  that  even  a  normal  and  healthful  demand 
must  be  curtailed  while  society  is  repairing  its  shattered 
forces. 

These  influences  at  work  in  the  merchandise  markets 
cannot  fail  to  have  an  influence  upon  the  market  for  capital. 
Capital  is  idle  and  redundant  during  the  period  of  liquida- 
tion following  a  crisis.  Those  who  have  it  are  afraid  to 
invest,  and  those  who  usually  employ  it  are  indisposed  to 
enter  the  market  as  borrowers.  When  this  feeling  has  par- 
tially subsided,  capital  can  be  obtained  at  low  rates,  so  long 
as  the  security  is  good,  because  it  is  so  plentiful.  Low  rates 
and  ample  supplies  of  capital  tempt  borrowers,  and  indus- 
tries develop  into  activity  and  reduce  the  idle  accumulation 
of  capital  in  the  banks.  The  demand  increases  the  rate  of 
interest,  at  the  same  time  that  the  demand  for  commodities 
increases  their  price  and  makes  more  money  necessary  to 
carry  on  a  given  business.  The  mere  advance  in  prices,  as 
pointed  out  by  Mr.  Mill,  tempts  to  increased  production,  to 
new  investments  and  increased  speculation,  and  every  such 
step  increases  the  demand  for  capital  at  the  same  time  that 
it  diminishes  the  supply.  The  time  comes  when  exports 
diminish  because  of  their  high  prices  as  compared  with 
those  of  the  same  goods  in  other  countries  ;  and  then  gold, 
—the  only  money  which  can  be  used  in  international  ex- 
changes,— begins  to  go  abroad,  instead  of  commodities,  in 
payment  for  commodities  imported. 

The  withdrawal  of  gold  from  the  bank  reserves  and  its 
export  abroad  is  usually  the  most  striking  visible  sign  that 


CRISES  AND    THEIR   CAUSES.  457 

business  is  upon  the  eve  of  a  crisis.  When  goods  can  no 
longer  be  sold  as  rapidly  as  they  are  produced, — partly  be- 
cause domestic  purchasers  can  no  longer  pay  the  enhanced 
prices  and  partly  because  foreign  purchasers  can  buy  similar 
goods  elsewhere  at  less  prices, — the  manufacturers  and  mer- 
chants are  no  longer  able  to  meet  their  obligations  at  the 
banks  at  maturity.  They  apply  for  extensions  and  continu- 
ances and  impose  a  constantly  increasing  strain  upon  the 
banking  reserves  of  the  banks.  When  the  banks  are  no 
longer  able  to  lend  with  the  same  freedom  as  before,  their 
weaker  customers  default  in  their  obligations,  and  the  panic 
begins.  The  dream  of  rapidly  acquired  riches,  of  constantly 
rising  prices,  of  a  perpetual  advance  in  the  stock  market  and 
of  extravagant  profits,  is  suddenly  brought  to  an  end  and 
merchants  lose  their  illusions  and  look  about  to  discover 
their  real  situation.  They  often  find  that  the  rise  in  the 
price  of  their  raw  materials  has  kept  pace  with  that  of  their 
products,  that  their  seeming  profits  have  been  calculated  by 
over-discounting  of  the  future,  and  that  they  have  a  great 
stock  of  goods  on  their  hands  which  cannot  be  sold  at  the 
cost  of  production. 

The  effects  of  a  crisis  upon  the  accounts  of  a  bank  follow 
so  uniform  a  rule  that  the  history  of  crises  might  easily  be 
traced,  by  one  who  understands  their  operation,  by  the  fluc- 
tuations in  the  bank  returns.  The  period  of  .speculation 
and  ascending  prices  is  marked  by  a  steadily  widening  sepa- 
ration between  the  amount  of  the  cash  reserves  and  of  the 
loans  and  discounts.  The  cash  falls  while  the  loans  rise. 
The  fall  in  the  cash  is  partly  due  to  the  steadily  growing 
domestic  demand  for  currency  and  credit,  to  meet  which  the 
cash  is  put  in  circulation  ;  but  the  decline  is  sharply  accen- 
tuated, after  speculation  reaches  the  danger-point,  by  the 
demand  for  cash  for  settling  foreign  balances  which  have 
ceased  to  be  settled  in  merchandise.  The  changed  condition 
of  the  bank's  accounts  up  to  this  point  is  brought  about  by 
the  gradual  operation  of  the  expansion  of  credit  and  the 
rise  of  prices.  The  discovery  that  the  danger-point  has  been 
reached,  and  that  cash  and  discounts  are  too  far  apart,  usu- 


458          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

ally  comes  suddenly,  as  the  result  of  heavy  withdrawals  of 
specie  for  export.  Then  begins  the  panic,  which  becomes 
more  or  less  acute  according  to  the  circumstances  of  the  case 
and  the  extent  to  which  credit  has  been  overstrained.  The 
demands  for  loans  and  advances  increase,  while  the  decline 
of  the  cash  reserve  becomes  so  rapid  as  to  compel  a  prudent 
bank  to  raise  the  rate  of  discount.  The  effect  of  the  in- 
crease in  the  discount  rate  is  to  diminish  the  demand  for 
credit  from  those  who  can  do  without  it,  while  it  attracts 
capital  from  abroad  or, — what  is  substantially  the  same  thing, 
— induces  foreign  creditors  to  suspend  the  withdrawal  of  their 
credits  by  the  attraction  of  their  higher  earning  power. 

The  moment  the  acute  danger  is  over  and  the  rush  for 
currency  has  ceased,  a  radical  change  comes  over  the  ac- 
counts of  the  bank  as  the  result  of  the  arrest  in  the  activity 
of  affairs.  The  demand  for  credit  declines  to  a  minimum, 
resulting  in  the  reduction  of  loans  and  discounts,  while  the 
diminished  demand  for  currency  sends  it  back  to  the  solvent 
banks  and  results  in  the  rapid  piling  up  of  specie  in  their 
reserves.  These  movements  are  the  result  of  inevitable 
financial  laws,  which  seem  to  act  with  automatic  precision  at 
the  various  stages  of  a  credit  cycle.  The  movement  of 
deposits  varies  somewhat,  according  to  the  real  pressure  of 
the  crisis  and  the  banking  rules  by  which  deposits  are 
regulated.  The  general  tendency  of  the  real  deposits,  — those 
which  are  not  merely  transfers  of  credit  by  the  bank  to  its 
customers  on  account  of  loans, — is  to  follow  the  cash  reserve. 
They  diminish  when  the  demand  for  currency  is  most  acute 
and  begin  to  accumulate  again  when  the  crisis  is  over. 
Their  recovery  is  usually  less  rapid  than  that  of  the  cash 
reserves  and  is  comparatively  slow  where  real  losses  have 
been  heavy  and  the  wealth  has  disappeared  which  made 
deposits  possible.  The  movement  to  withdraw  deposits  be- 
cause of  distrust  of  the  solvency  of  the  banks  is  more  abnor- 
mal and  has  been  reduced  in  recent  crises  to  a  comparatively 
small  factor.  Such  withdrawals,  without  commercial  reasons, 
greatly  cripple  the  powers  of  a  bank  to  assist  those  who 
need  assistance  and  have  been  among  the  most  serious  dan- 


CRISES  AND    THEIR   CAUSES.  459 

gers  of  financial  crises,  where  banking  was  not  regulated  by 
sound  laws  and  among  peoples  where  its  methods  were  not 
well  understood. 

The  intensity  of  the  demand  for  credit  after  the  arrest  of 
inflation  and  of  the  rise  of  prices  is  usually  in  an  inverse 
ratio  to  the  possibility  of  getting  it.  The  demand  of  the 
moment  is  for  cash,  or  what  represents  cash  in  its  general 
acceptability  in  the  discharge  of  obligations.  So  long  as 
banks  are  solvent,  and  their  solvency  is  generally  credited, 
bank-notes  fulfil  this  demand  as  absolutely  as  gold.  This 
has  been  proved  repeatedly  in  the  case  of  the  Bank  of  Eng- 
land and  of  the  Scotch  banks,  and  was  proved  in  the  case  of 
the  banks  of  the  United  States  during  the  crisis  of  1893. 
If  currency  is  hoarded  under  a  solvent  banking  system,  it  is 
because  the  amount  is  believed  to  be  limited  and  those  who 
hoard  it  fear  that  they  may  not  be  able  to  obtain  the  share 
which  they  need  at  the  moment  when  it  may  be  demanded. 
An  elastic  limit  of  note  issue  is  a  powerful  weapon  for  restor- 
ing financial  confidence  on  such  occasions.  It  was  the 
existence  of  a  practically  rigid  limit  in  England  in  1847, 
1857,  and  1866,  and  in  the  United  States  in  1893,  which  led 
to  the  pressure  for  currency  and  the  tendency  to  hoard  it. 
The  removal  of  the  rigid  limit, — by  means  of  the  suspension 
of  the  Bank  Act  in  England  and  by  the  issue  of  Clearing 
House  certificates  and  certified  checks  in  the  United  States, 
— did  much  to  restore  healthful  conditions  to  the  financial 
organism. 

The  expansive  theory,  at  it  is  called  by  Professor  MacLeod, 
has  been  too  often  tested  during  the  past  half  century  against 
the  restrictive  theory  to  leave  any  doubt  as  to  the  wisdom  of 
the  former.  The  expansive  theory  involves  loans  in  times 
of  panic  up  to  the  utmost  limit,  upon  good  security,  which 
the  resources  of  the  bank  permit,  in  order  to  meet  the 
emergency  of  the  moment.  A  solvent  bank  need  have  no 
fear  in  a  crisis,  if  it  has  the  power  to  issue  notes  which 
command  the  public  confidence,  that  it  will  not  find  its  specie 
reserves  fully  restored  after  the  acute  stage  of  the  crisis  is 
over.  The  power  of  note  issue  may  be  employed  to  the 


460          HISTORY  OF  MODERN  BANK'S  OF.  ISSUE. 

extreme  limit,  so  long  as  general  business  itself  and  the 
business  of  the  bank  are  substantially  sound.  The  restrict- 
ive theory  assumes  the  necessity  of  bringing  everything  at 
once  to  a  metallic  basis.  It  is  supposed  to  have  the  effect 
upon  the  congested  financial  body  of  a  healthy  purging  ; 
and  the  principle  might  be  defensible,  if  it  were  not  for  the 
hardships  which  it  causes  to  persons  who  have  not  carried 
the  inflation  of  their  business  to  an  extreme  point  and  who 
are  simply  embarrassed  by  the  unusual  clamor  of  the  moment 
for  cash.  One  of  the  duties  of  the  banks  is  to  sustain  such 
people  until  the  panic  is  over  and  the  operations  of  credit 
return  to  their  normal  channels.  In  the  language  of  Mr. 
Bagehot,  in  criticising  the  course  of  the  Bank  of  England  :  * 

What  is  wanted  and  what  is  necessary  to  stop  a  panic,  is  to  diffuse 
the  impression  that  though  money  may  be  dear,  still  money  is  to  be 
had  ;  if  people  could  be  really  convinced  that  they  could  have  money 
if  they  wait  a  day  or  two,  and  that  utter  ruin  is  not  coming,  most 
likely  they  would  cease  to  run  in  such  a  mad  way  for  money. 

The  regularity  with  which  production  and  the  absorption 
of  capital  proceed,  from  the  period  of  quiescence  after  a 
crisis  to  the  point  of  excessive  expansion,  followed  by  a 
sudden  check,  a  crisis  and  a  new  period  of  quiescence,  justifies 
the  theory  that  crises  are  substantially  periodic  in  their 
recurrence.  The  seeking  of  special  causes  may  be  of  value 
to  enable  the  business  community  to  guard  against  the  repe- 
tition of  old  mistakes,  but  the  belief  that  conditions  can  be 
produced  which  will  put  an  end  to  the  regular  cycle  of 
credit  contraction  and  expansion  has  not  been  justified  by 
any  theory  of  banking,  of  trade,  or  of  public  finance  which 
has  yet  been  tested.  The  field  for  making  such  tests  is 
limited  to  a  few  great  commercial  nations,  because  the 
perturbations  in  nations  where  production  is  more  limited  and 
credit  more  restrained  are  of  a  different  character,  often 
influenced  more  by  local  than  general  causes,  and  afford 
little  instruction  for  the  great  trading  nations.  These  great 
nations,  moreover,  are  governed  by  the  most  divergent 

1  Lombard  Street,  Works,  V.,  45. 


CRISES  AND    THEIR   CAUSES.  461 

policies  in  respect  to  tariffs,  monetary  standards,  banking 
methods,  and  the  intervention  of  the  State  in  private  affairs ; 
yet  the  phenomena  of  recurring  cycles  of  expansion  and 
contraction,  of  exaltation  and  of  depression,  are  in  many 
respects  the  same.1  In  the  language  of  M.  Juglar,  "  Wars, 
revolutions,  tariff  changes,  loans,  variations  of  fashion,  new 
pathways  opened  to  commerce  are  still  accused  "  as  the  cause 
of  crises.3  One  of  these  events  often  comes  to  precipitate 
the  panic  at  a  particular  moment,  like  the  match  which 
causes  the  explosion  when  the  powder  train  is  fully  laid. 
These  special  causes,  however,  grow  less  easy  of  definition 
and  isolation  as  the  structure  of  commerce  and  credit  grows 
more  complex  and  the  industries  of  every  producing  nation 
reach  out  to  new  and  diversified  fields. 

The  salient  feature  of  nearly  every  crisis  has  been  the 
sinking  of  capital  in  unproductive  enterprises.  These  en- 
terprises have  usually  been  in  new  fields,  whose  limitations 
have  not  been  accurately  measured  by  investors  or  even  by 
capitalists  of  presumed  judgment  and  experience.  The 
opening  of  such  a  field  has  been  followed  by  a  rush  in  that 
direction,  which  has  quickly  exhausted  all  its  possibilities 
and  resulted  in  overproduction  and  the  loss  of  the  capital 
invested.  New  discoveries  and  the  opening  of  new  conti- 
nents have  contributed  greatly  to  these  mistakes  during  the 
modern  commercial  age.  One  of  the  earliest  of  these  phe- 
nomena, which  took  place  under  modern  conditions,  was  the 
sinking  of  capital  in  canals  in  Kngland  in  the  middle  of  the 

1  The  argument  is  not  without  plausibility  that  the  protective  tariff 
policy  contributes  to  the  frequency  and  severity  of  crises,  by  the  arti- 
ficial stimulus  which  it  gives  to   favored  industries, — inviting  great 
investments  of  capital  in  these  directions,  which  result  in  overpro- 
duction and  subsequent  stagnation.     The  effect  of  such  a  policy  would 
seem  to  be  to  give  a  jerky  development  to  industry,  causing  successive 
periods  of  extreme  activity  and  exhaustive  reaction,  like  the  effect  of 
powerful  stimulants  upon  the  physical  body.     The  protectionists  are 
able  to  answer  that  Great  Britain,  the  chief  free-trade  country,  has 
suffered  panics  as  acute  as  those  of  any  other  nation,  if  they  have 
not  affected  equally  her  permanent  prosperity. 

2  Des  Crises  Commer dales,  5. 


462          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

eighteenth  century.  It  was  the  beginning  of  the  wonderful 
new  birth  of  the  world  out  of  the  grave  of  feudalism  into 
the  modern  age  of  machinery,  steam,  and  electricity.  The 
sinking  of  capital  in  canals  was  followed  by  changes  from 
hand  to  machine  labor,  which  threw  laborers  out  of  employ- 
ment and  destroyed  the  value  of  their  simple  tools  ;  by  loans 
to  farmers  for  enclosure  and  irrigation  ;  by  immense  subsidies 
by  England  to  European  nations  ;  and  by  fifteen  years  of  the 
continuous  waste  of  war.  When  the  investing  public  of  Great 
Britain  and  Europe  had  recovered  from  the  losses  consequent 
on  these  events,  they  permitted  millions  to  be  swept  away  in 
the  crisis  of  1825  by  foolish  investments  in  Latin-American 
securities  ;  in  1837,  by  loans  in  the  United  States  ;  in  1847, 
by  the  failure  of  the  cotton  crops  ;  in  1857,  by  railway  specu- 
lation ;  in  1866,  by  the  effects  of  the  American  war  and  use- 
less investments  in  cotton  mills  and  ships  ;  in  1873,  by 
railway  building  in  the  American  wilderness ;  and  in  1890, 
by  a  new  fever  of  investment  in  South  America. 

The  overproduction  of  commodities  by  means  of  machinery 
has  been  one  of  the  recent  forms  of  the  sinking  of  capital. 
The  use  of  machinery  has  immensely  increased  the  produc- 
tive power  of  the  world  and  added  to  the  sum  of  comforts  to 
be  distributed  among  mankind.  But  this  power  of  produc- 
tion has  been  carried  to  such  a  point  that  it  has  in  many 
cases  outrun  the  effective  demand  of  the  community. 1  Over- 
production in  a  broad  sense  is  hardly  within  the  power  of 
the  entire  producing  mechanism  of  mankind.  The  world 


1  Prof.  Lexis  of  Gottingen  points  out  that  overproduction  is  now 
due  in  many  cases  to  the  development  of  the  industrial  capacity  of 
establishments  far  beyond  any  concurrent  market  demand  and  to  their 
long  continued  operation  when  they  have  ceased  to  pay  dividends. 
Abstract  political  economy  of  the  old  school  taught  that  when  prices 
no  longer  equalled  the  cost  of  production  and  a  fair  profit,  production 
would  be  diminished  or  suspended  ;  but  the  system  of  joint  stock 
companies  enables  many  to  remain  in  operation  for  years  without 
paying  dividends,  where  an  individual  employer  would  close,  and 
even  the  latter  is  often  tempted  to  continue  an  unprofitable  produc- 
tion upon  the  theory  that  he  thereby  avoids  the  "  deterioration  of  the 
plant."— Wells,  73. 


CRISES  AND    THEIR   CAUSES.  463 

is  not  too  rich  in  the  products  of  human  labor,  but  is  still 
too  poor.  But  overproduction  for  all  practical  purposes  is 
production  beyond  the  effective  demand  of  those  who  have  the 
means  and  habit  of  using,  and  the  capital  employed  in  the  pro- 
duction of  goods  which  are  not  consumed  is  more  hopelessly 
sunk  than  if  devoted  to  railways  or  public  works  ;  for  railways 
and  public  works  may  prove  of  value  in  the  future,  even  if 
their  production  has  outrun  the  necessities  of  the  present. ' 

One  of  the  striking  effects  of  a  commercial  crisis  under 
modern  conditions  is  its  influence  upon  the  distribution  of 
wealth.  Accumulated  capital  suffers  much  more  than  pro- 
ductive industry  and  the  result  is  to  transfer  the  interest  on 
such  accumulations  and  a  part  of  the  principal  to  labor. 
Those  laborers  who  continue  to  earn  their  customary  wages, 
including  those  who  earn  professional  salaries  as  well  as 
those  who  labor  with  their  hands,  are  benefited  materially 
in  a  period  of  low  prices,  because  of  the  greatly  increased 
purchasing  power  of  their  earnings.  Even  laborers  who  are 
thrown  out  of  employment  cannot  suffer  any  such  loss  in  a 
modern  civilized  state  as  is  suffered  by  capital  ;  for,  if  they 
are  without  savings,  they  derive  the  means  of  subsistence 
from  public  charity,  contributed  by  taxation  upon  the  accu- 
mulated earnings  of  capital.  Only  so  far  as  their  degree  of 
comfort  under  such  conditions  differs  from  that  when  they 
are  wage  earners  do  they  suffer  an  actual  material  loss, 
whatever  may  be  the  social  evils  of  their  situation. 

But  the  effect  of  a  crisis  upon  the  distribution  of  wealth  is 
more  profound  than  the  mere  losses  which  it  occasions 
during  the  period  of  acute  depression.  Such  a  crisis  is  the 
result  of  overproduction  and  is  followed  by  the  accumula- 
tion of  idle  capital  in  the  banks  and  public  depositaries. 
Every  crisis  of  modern  times  has  witnessed  a  greater  ac- 

1  Prof.  Paul  Leroy-Beaulieu  points  out  that  a  railway  constitutes  an 
actual  economic  benefit  to  the  community,  even  though  it  fails  to  pay 
operating  expenses,  if  the  economy  in  transportation  which  results 
from  its  operation  as  compared  with  pre-existing  means  of  transpor- 
tation is  sufficient  to  pay  the  interest  on  the  capital  invested. — La 
Science  des  Finances,  II. ,  216,  note. 


464          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

cumulation  of  idle  capital  than  those  which  have  preceded, 
and  the  result  has  been  keenly  felt  in  recent  years  in  the 
decline  in  the  rate  of  interest.  A  given  capital  which  earned 
six  per  cent,  a  decade  or  two  ago  now  earns  but  three  or 
four  per  cent,  and  double  the  accumulation  is  required  to 
render  the  same  return.  Every  crisis  corrects  the  tendency 
to  the  undue  earnings  of  accumulated  capital  by  arresting 
the  advance  in  prices,  reducing  the  value  of  manufacturing 
and  railway  plants  and  of  the  securities  which  represent 
them,  and  in  many  cases  compelling  the  readjustment  of 
nominal  capital  upon  a  reduced  basis.  Capital  is  often 
deprived  absolutely  of  earning  capacity  for  several  years 
following  a  crisis.  This  implies  that  if  production  continues, 
the  proceeds  are  distributed  without  charge  beyond  the 
wages  of  labor  among  the  consumers  of  the  community. 
An  industrial  enterprise  which  continues  to  operate  without 
profit  or  at  a  loss  during  a  period  of  depression  transfers  all 
its  benefits,  therefore,  to  the  wage  earners,  and  their  wealth  is 
enhanced  at  the  expense  of  the  owners  of  inherited  or  accu- 
mulated capital.1 

The  argument  is  sometimes  made  that  issues  of  paper 
currency  pave  the  way  for  crises  because  they  pile  up  a  vast 

1  This  theory  has  been  more  boldly  worked  out  by  Bastiat  in  his 
Harmonies  Economiques^  and  recently  by  M.  Budore  Pirmez  in  his 
La  Crise  :  Situation  Economique  de  la  Belgique,  1884,  who  declares 
that  "In  the  measure  that  capital  increases,  the  absolute  share  of 
the  capitalist  in  the  total  product  is  augmented  and  his  relative  part 
diminished.  The  laborer,  on  the  contrary,  sees  his  share  augment 
in  both  senses."  A  striking  illustration  of  the  shrinkage  of  the 
earnings  of  capital  is  afforded  by  a  table  printed  by  M.  Hector  Denis, 
showing  the  dividends  of  corporations  in  Belgium  from  1870  to  1890. 
The  maximum  was  attained  in  1871,  when  corporate  earnings  were 
77,332>342  francs.  The  figures  shrunk  in  1877  to  38,837,320  francs, 
after  which  they  gradually  recovered  until  1883,  when  they  were 
61,860,805  francs.  There  were  some  losses  in  succeeding  years,  and 
the  amount  in  1885  was  48,721,046  fi an cs,  but  the  total  in  1890  had 
risen  again  to  71,875,225  francs.  It  is  obvious  that  a  range  of  fluctu- 
ations representing  fifty  per  cent,  of  the  maximum  is  greater  than 
could  be  matched  for  the  aggregate  earnings  of  labor.  La  Depression 
Economique  et  Sociale,  61-79. 


CRISES  AND    THEIR    CAUSES.  465 

credit  structure  on  a  slender  basis  of  coin.  While  this  con- 
ception may  have  some  incidental  truth,  the  fundamental 
idea  upon  which  it  is  usually  based  is  wrong.  A  bank-note 
is  secured  by  the  substantial  assets  of  the  bank,  which  are 
chiefly  bills  of  exchange  representing  commodities.  It  does 
not  matter,  so  long  as  the  bills  are  genuine,  that  the  same 
merchandise  may  have  been  the  subject  of  several  transac- 
tions and  of  several  bills,  for  the  maker  or  endorser  has  in 
each  case  substantial  means  to  cover  his  obligations  if  he  is 
doing  a  prudent  business.  Credit  may  be  overstrained, 
fictitious  bills  may  be  drawn,  and  losses  may  result,  but 
such  losses  are  not  often  due  to  the  issue  of  bank-notes.  A 
man  may  strain  his  credit  by  too  many  verbal  promises  to 
pay  bags  of  gold,  where  a  purely  metallic  currency  is  used, 
just  as  he  may  strain  it  by  putting  those  promises  in  the 
form  of  negotiable  paper.  He  may  strain  it  even  more  by 
book  credits  and  abuse  of  the  confidence  of  capitalists  than 
he  can  ever  do,  under  modern  conditions,  by  obtaining  notes 
from  a  banker.  Nothing  but  the  brushing  away  of  all  forms 
of  credit,  and  return  to  barter  and  the  hoarding  of  vast  piles 
of  gold,  would  prevent  any  possible  abuse  of  credit ;  and 
that  would  be  the  destruction  of  modern  commerce,  with 
all  the  increase  in  productive  power  and  the  distribution  of 
the  products  of  that  power  which  it  has  brought  to  the 
human  race. 

The  conception  that  every  transaction  in  which  coin  does 
not  pass  is  a  credit  transaction  ignores  the  essential  fact 
that  the  business  community  is  trading  in  commodities  and 
not  in  the  precious  metals.  The  advocates  of  a  larger 
metallic  circulation  have  a  favorite  metaphor  by  which  they 
picture  ' '  the  vast  structure  of  credit ' '  as  an  inverted 
pyramid,  supported  in  unstable  equilibrium  upon  a  golden 
apex.  A  better  image  than  that  of  the  inverted  pyramid 
would  be  that  of  the  railway  or  canal,  which  by  a  single 
route  permits  the  happy  interchange  of  all  commodities.1 

1  "Currency,  therefore,  4  is  not  capital,  any  more  than  ships  are 
freight ;  it  is  only  a  labor-saving  machine  for  making  easy  transfers." 
Suniner,  History  of  American  Currency,  171. 


466 


HISTORY  OF  MODERN  BANKS  OF  ISSUE. 


Proper  facilities  for  transportation  do  not  require  a  car  for 
every  car-load  of  wheat  which  exists  nor  a  canal  broad 
enough  for  all  vessels  to  pass  abreast.  The  possibility  of 
having  the  car  when  it  is  needed,  the  promise  of  the  use  of 
the  canal  for  a  brief  time,  serve  every  purpose  ;  and  no  one 
thinks  of  charging  that  the  transportation  system  is  "  a  vast 
structure  of  credit ' '  resting  upon  a  few  real  cars  or  upon 
abnormally  narrow  tracks. 


CHAPTER  XX. 

THE    EARLY  CRISES  OF  THE  CENTURY. 

The  Periodicity  of  Crises  up  to  1793 — The  Use  of  Accommodation 
Bills  in  the  Crisis  of  1782— The  Effects  of  the  Napoleonic  Wars 
and  the  Crisis  of  1810 — The  Speculative  Mania  of  1825 — The 
Specie  Circular  and  the  Bank  War  in  the  United  States— The 
Railway  Development  and  the  Crisis  of  1847. 

THE  development  of  existing  methods  of  commerce 
and  of  credit  belongs  essentially  to  the  period  of  the 
last  century  and  a  half.  Great  commercial  transactions 
were  carried  on  before  that  time,  but  they  were  carried  on  by 
other  banking  methods  than  those  of  the  modern  age.  The 
world  was  not  linked,  as  it  is  to-day,  in  all  its  parts,  by  a 
community  of  commercial  operations  and  by  houses  of 
international  banking  credit.  Such  economic  crises  as  oc- 
curred were  local  in  their  effects  and  were  produced,  much 
more  directly  and  more  often  than  those  of  to-day,  by 
political  events.  Their  chief  interest,  therefore,  is  in  demon- 
strating the  essentially  periodic  character  of  such  convulsions 
wherever  commerce  has  attained  anything  like  its  niodeni 
development.  Professor  Jevons  finds  some  evidence  of  a 
stock-jobbing  mania  as  far  back  as  1682  and  others  in  1711, 
1721,  1731,  1763,  1772-73,  and  1783,  with  evidence  of  periods 
of  high  prices  in  1742  and  1752.  Complaints  of  stock  job- 
bing and  "  bubbling  "  were  so  pronounced  that  acts  were 
passed  by  Parliament  in  1710  and  1711,  and  again  in  1733, 
with  the  result,  according  to  Defoe,  that  "  a  happy  stop  was 
put  to 'this  spreading  mischief."  * 

1  Jevons,  Investigations  in  Currency  and  Finance,  210-211. 

46;' 


468          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

The  first  serious  credit  crisis  of  which  authentic  details 
exist  was  that  of  1763,  when  the  inflated  bubble  blown  by 
the  Seven  Years'  War  was  pricked  by  the  coming  of  peace. 
This  crisis  is  of  peculiar  interest,  because  it  was  most  severe 
at  Amsterdam  and  Hamburg,  where  no  paper  currency  was 
employed  except  the  "bank  money  "  issued  against  deposits 
of  coin  by  the  Bank  of  Amsterdam  and  the  Bank  of  Ham- 
burg. The  next  great  crisis,— that  of  1772, — fell  upon  Eng- 
land and  Scotland  in  the  midst  of  a  period  of  remarkable 
industrial  and  inventive  activity.  The  first  act  for  the  build- 
ing of  a  canal  in  England  was  passed  in  1755,  and  the  next 
twenty-five  years  witnessed  the  construction  of  a  network 
of  canals  more  extensive  than  those  of  any  other  country 
except  Holland.  Brindley  completed  the  canal  from  Worsley 
to  Manchester  in  1762  and  Arkwright  and  Watt  were  at  the 
same  time  developing  their  wonderful  mechanical  inventions. 

The  practice  of  drawing  accommodation  bills  seems  to 
have  come  into  use  in  Scotland  for  the  first  time  just  before 
this  crisis,  although  there  is  evidence  that  it  had  been  prac- 
tised earlier  in  England.  A  newspaper  of  the  time  contained 
a  letter  stating  that  * '  Banking  companies  had  appeared  in 
almost  every  corner  of  the  Kingdom,  and  bills  of  exchange 
had  been  multiplied  by  a  new  method  called  Swivelling, 
without  any  solid  transactions."  '  Adam  Smith  alludes  to 
"  the  well-known  shift  of  drawing  and  redrawing,"  and  says 
that  "  The  practice  of  raising  money  in  this  manner  had 
been  long  known  in  England,  and  during  the  course  of  the 
late  war,  when  the  high  profits  of  trade  afforded  a  great 
temptation  to  overtrading,  is  said  to  have  been  carried  on  to 
a  very  great  extent."  *  Professor  MacLeod  declares  the 
system  of  accommodation  bills  to  be  "  the  curse  and  bane  of 
commerce,"  and  expresses  the  opinion  that  "it  has  been  the 
great  cause  of  those  frightful  commercial  crises  which  seem 
periodically  to  recur."  The  English  courts  have  decided, 
however,  that  a  bill  given  for  a  consideration  is  a  good  bill 


1  Public  Advertiser,  July  8,  1772,  quoted  by  MacLeod,  II.,  215. 
8  Wealth  of  Nations,  Book  II.,  Ch.  ii. 


THE  EARLY  CRISES  OF  THE   CENTURY.  469 

and  that  such  consideration  exists  when  such  bills  are  mu- 
tually interchanged.  This  makes  it  difficult  to  legislate 
against  accommodation  bills,  even  if  it  were  desirable,  with- 
out destroying  banking  transactions,  which  are  based  upon 
a  similar  interchange  of  credits.1 

The  crisis  of  1783  is  notable  for  having  had  an  international 
character,  in  affecting  the  Caisse  d' Escompte  in  Paris  as  well 
as  the  British  banks,  and  for  the  enlightened  policy  of  sus- 
taining credit  adopted  by  the  Bank  of  England.  A  policy 
of  rigid  contraction  was  at  first  followed  by  the  directors, 
but  as  soon  as  this  policy  had  turned  the  flow  of  bullion 
towards  England  they  came  boldly  to  the  assistance  of  the 
government  and  expanded  their  discounts  to  solvent  houses. 
A  different  policy  was  pursued  in  the  crisis  of  1793  and  it 
was  the  government,  instead  of  the  bank,  which  came  to  the 
relief  of  credit.  Everything  was  ripe  in  England  in  1792 
for  the  explosion  of  a  crisis  when  the  disturbances  in  France 
and  the  declaration  of  war  by  the  National  Convention 
applied  the  torch.3  A  large  failure  occurred  in  London  on 
February  15,  1793,  and  the  panic  spread  throughout  England, 
causing  the  failure  of  over  one  hundred  of  the  country  banks 
and  frightening  the  Bank  of  England  into  the  reduction  of 
its  discounts.3  The  pressure  for  money  suggested  to  Sir 
John  Sinclair  a  return  to  Montague's  device  in  1697  of  issu- 
ing Exchequer  bills  to  solvent  merchants.  A  committee  was 
appointed  by  the  House  of  Commons,  which  promptly  re- 

1  MacLeod,  Theory  and  Practice  of  Banking,  I.,  359-68. 

2  M.  Juglar  lays  stress  upon  the  fact  that  this  crisis  was  a  typical 
commercial  crisis,  due  to  economic  conditions,  and  was  not  essentially 
hastened  by  the  declaration  of  war,  for  unfavorable  exchanges  and 
exports  of  specie  had  already  set  in  twelve  months  before  hostilities. 
France  suffered  a  severe  crop  failure  in  1789,  but  this  did  not  arrest 
the  expansion  of  credit  and  of  commercial  operations  until  the  period 
of  ten  years  from  the  preceding  crisis  of  1783. — Des  Crises  Commer- 
ciales>  302. 

3  Country  merchants  and  bankers  were  permitted  under  then  exist- 
ing laws  to  issue  optional  notes,  payable  in  the  country  or  in  London, 
and  it  is  stated  that  out  of  279  country  bankers  issuing  notes  204 
issued  these  optional  notes. — Levi,  69. 


470          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

ported  in  favor  of  the  issue  of  ^£5, 000,000  in  such  bills  under 
the  direction  of  a  board  of  commissioners.  The  bill  was 
passed  after  some  opposition  and  afforded  almost  instant 
relief.  Applications  for  ,£2,202,000,  made  by  238  persons  or 
firms,  were  granted  and  only  forty-nine  applications  were 
definitely  rejected.  Only  two  of  the  parties  assisted  became 
bankrupt,  much  of  the  money  was  repaid  before  it  was  due, 
and  the  government  obtained  a  clear  profit,  above  all  inci- 
dental expenses,  of  ,£4348. 

The  period  from  the  crisis  of  1793  to  the  close  of  the  Na- 
poleonic wars  in  1815  was  marked  by  several  spasms  of  panic 
in  the  markets  of  Great  Britain  and  the  Continent,  but  these 
convulsions  were  so  directly  due  to  political  events  that 
they  lose  much  of  the  regular  character  of  commercial  phe- 
nomena. The  period  of  expanding  credit  was  interrupted 
in  England  by  the  suspension  of  specie  payments  in  1797, 
and  was  again  cut  short  in  1803,  after  the  upward  movement 
had  been  resumed,  by  the  rupture  of  the  Peace  of  Amiens. 
France  witnessed  a  collapse  of  credit  soon  after  the  rupture 
of  the  Peace,  which  brought  Napoleon  back  from  Austerlitz 
to  reorganize  the  Bank  of  France.  *  The  speculative  oppor- 
tunities of  the  long  war  left  their  impress  upon  the  trade  of 
Europe  and  the  United  States  for  many  years,  and  the  inci- 
dents of  the  trade  drove  the  United  States  into  war  with 
Great  Britain. 

The  Crisis  of  1810. 

The  publication  of  the  Berlin  decree  of  Napoleon  on  No- 
vember 21,  1806,  shutting  British  commerce  out  of  Europe, 
was  one  of  a  series  of  events  which  led  to  the  wildest  specu- 
lation in  raw  materials  and  steadily  advanced  their  prices. 
The  products  of  the  countries  of  the  East  rose  to  double  or 
treble  their  usual  figures,  and  the  French  occupation  of 
Spain  quadrupled  the  price  of  Spanish  wool.  France  was 
supreme  in  Italy,  which  affected  the  value  of  silk,  and  she 
attempted  to  dictate  a  policy  of  exclusion  against  Great 
Britain  to  Russia  and  Sweden.  These  efforts  of  the  French 

1  Vide  p.  52. 


THE  EARLY  CRISES  OF  THE  CENTURY.  471 

Emperor  were  far  from  effective  in  stifling  commerce,  but 
they  gave  it  the  character  of  a  speculation  and  enhanced  its 
profits  when  it  was  successful.  The  imports  of  the  United 
Kingdom  increased  from  ^28,561,270  in  1805  to  .£39,301,- 
612  in  1810  and  the  exports  increased  in  the  same  period 
from  £3 1, 064,492  to  ;£43»568>757-  England  lost  trade  in 
the  United  States  by  her  retaliatory  decrees  against  Na- 
poleon, which  drove  American  products  to  France,  but  Brit- 
ish goods  penetrated  through  Napoleon's  paper  blockade  at 
Embden  and  Hamburg,  and  the  corrupt  French  officials 
grew  rich  as  the  price  of  certifying  that  these  goods  were  the 
product  of  Prussian  factories.1  The  country  banks  of  Eng- 
land increased  under  the  stimulus  of  speculation  from  270 
in  1797  to  600  in  1808,  and  721  in  1810.  The  Bank  of  Eng- 
land, in  the  meantime,  increased  its  discounts  from  .£9,100,- 
ooo  in  1804  to  .£16,400,000  in  1809,  and  £2 1,400,000  in  1810. 
The  circulation  of  the  Bank  of  England  rose  from  ,£16,400,- 
ooo  in  1801  to  £24,200,000  in  1810,  but  the  increase  was 
trifling  up  to  1809  and  was  the  consequence  rather  than  the 
cause  of  the  great  increase  in  prices  due  to  speculation. 

If  over-issues  of  bank-notes  were  responsible  in  some  de- 
gree for  the  speculative  mania  in  England,  rather  than 
merely  its  convenient  tools,  it  was  because  the  divorce  of 
the  paper  currency  from  specie  made  bank-note  issues  easy 
and  their  issuers  irresponsible.  The  proof  that  the  specula- 
tive mania  was  not  due  entirely  to  the  issues  of  paper  money 
in  Great  Britain  may  be  found  in  the  fact  that  a  like  condi- 
tion existed  in  France,  which  was  upon  a  specie  basis.  The 
liquidation  which  followed  the  crisis  of  1805  caused  coin  to 
pile  up  in  the  Bank  of  France  to  such  an  extent  that  the 
bank  was  obliged  to  invest  a  part  in  the  obligations  of  the 
receivers  general  and  to  reduce  interest  to  two  and  three  per 
cent.2  Commerce  began  to  expand  again  in  1808,  and  the 
discounts  of  the  Bank  of  France  reached  in  that  year  142,- 
000,000  francs  and  in  1810  187,000,000  francs.  Numerous 
failures  occurred  in  1810,  but  the  leading  merchants  of  Paris 

1  Cunningham,  II.,  521,  note. 
2Juglar,  406. 


472          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

kept  their  heads,  discouraged  exaggerated  speculations,  and 
prevented  a  serious  panic.  In  England,  business  came  to  a 
standstill,  the  discounts  of  the  bank  dropped  from  ^23,000,- 
ooo  to  ^12,000,000  and  on  April  n,  1811,  the  Treasury 
came  to  the  rescue  of  the  market  by  an  advance  of  ^6,000,- 
ooo  in  Exchequer  bonds  to  merchants  offering  good  security. 
The  period  of  liquidation  was  made  more  severe  than  usual 
and  recovery  slower  by  the  great  poverty  of  the  crops  of 
1811.  Speculation  in  agricultural  products  and  land  led  to 
the  rapid  extension  of  the  system  of  enclosure  of  land  which 
had  formerly  been  in  commons.  Such  large  sums  were  sunk 
in  fencing  and  improvements  and  so  much  land  was  brought 
under  cultivation  that  the  fall  of  prices,  upon  the  close  of 
the  Napoleonic  wars  and  the  resumption  of  specie  payments, 
ruined  many  small  cultivators  and  threw  their  land  again 
upon  the  market.1 

The  Crises  of  1814.- 19. 

The  commercial  movements  of  the  second  decade  of  the 
present  century  reflected  the  disturbed  condition  of  public 
affairs.  The  policy  of  crushing  each  other's  trade  by  paper 
blockades  and  interference  with  the  rights  of  neutrals,  which 
governed  England  and  her  allies  on  one  side  and  France  and 
her  dependencies  on  the  other,  made  commerce  like  the  cast- 
ing of  dice  in  a  game  of  chance.  Markets  which  had  been 
closed  to  English  and  American  goods  were  opened  from 
time  to  time,  with  the  expulsion  of  the  French  from  Portu- 
gal and  Spain  and  the  accession  of  Russia  and  Sweden  to 
the  coalition  against  Napoleon.  The  news  of  his  disasters 
in  Russia  in  the  autumn  of  1812  diffused  the  belief  in  Eng- 
land that  the  French  Emperor  was  upon  the  eve  of  his  down- 
fall and  that  France  would  soon  be  thrown  open  to  the 
commerce  of  the  world.  Speculation  ran  riot  in  colonial 
produce,  which  it  was  believed  would  find  a  ready  market 
in  France  at  the  extravagant  prices  which  ruled  there  for 
the  small  quantities  which  had  escaped  the  Continental 
1  Cunningham,  II.,  479. 


THE  EARLY  CRISES  OF  THE   CENTURY.  473 

blockade.1  The  rejection  of  the  recommendations  of  the 
Bullion  Report  and  the  depreciation  of  irredeemable  bank- 
notes in  England  encouraged  the  delusion  that  the  growth 
of  wealth  was  commensurate  with  the  rise  of  prices.  Prices 
reached  their  maximum  at  the  moment  of  the  abdication  of 
Napoleon  in  the  spring  of  1814  and  the  coming  of  the  gen- 
eral peace.  The  opening  of  the  Continental  markets  had 
been  too  greatly  discounted,  goods  could  not  be  sold  at  the 
prices  at  which  they  were  held,  and  the  fabric  of  paper 
wealth  tumbled  like  a  house  of  cards.  The  country  banks 
failed  by  the  score  in  1815,  1816,  and  1817,  and  the  disap- 
pearance of  their  notes  so  contracted  the  paper  circulation 
that  Bank  of  England  paper  seemed  for  a  moment  on  the 
point  of  touching  par.2 

The  United  States  were  already  feeling  the  embarrassments 
of  a  new  country  in  maintaining  an  adequate  metallic  circu- 
lation, when  the  War  of  1812  and  the  financial  incompetence 
of  the  government  precipitated  a  crisis.  The  expiration  of 
the  charter  of  the  Bank  of  the  United  States  in  1811  brought 
many  new  banks  into  the  field  and  a  veritable  banking  mania 
prevailed  for  several  years  in  the  Middle,  Southern,  and  West- 
ern States.  The  offer  of  the  Pennsylvania  shareholders  of 
the  Bank  of  the  United  States  to  pay  a  bonus  of  $500,000  to 
the  State  for  the  privileges  of  a  State  charter,  and  to  loan 
the  State  $500,000  in  addition, 3  aroused  such  extravagant 
estimates  of  the  profits  of  banking  that  the  proposition  was 
rejected  and  an  effort  made  to  secure  these  profits  for  local 
banks.  A  bill  authorizing  forty-one  new  banks  was  passed 
over  the  veto  of  the  governor  and  thirty-seven  of  them  went 
into  operation  in  1814.  Similar  events  occurred  in  other 
States,  and  in  two  years  the  number  of  banks  in  the  United 
States  increased  from  88  to  208.  The  volume  of  specie  was 
not  adequate  to  support  the  mass  of  credit  thus  attempted 
to  be  created  and  what  there  was  in  the  country  rapidly 

1  Coffee,  which  was  four  pence  per  pound  in  England,  had  been 
selling  for  four  or  five  shillings  in  France. — Juglar,  323. 

2  Vide  p.  in. 
3McMaster,  IV.,  287. 


474          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

drifted  to  New  England,  where  prices  were  low  and  transac- 
tions were  upon  a  metallic  basis. 1 

It  needed  but  a  breath  to  overthrow  credit  in  the  South 
and  West,  and  the  motive  came  with  the  capture  of  Wash- 
ington on  August  24,  1814.  The  banks  of  Philadelphia 
announced  their  suspension  on  August  3ist,  and  the  banks 
of  New  York  followed  on  the  next  day,  and  did  not  resume 
until  after  the  creation  of  the  second  Bank  of  the  United 
States  in  1817.  The  country  was  stripped  of  specie,  notes 
were  issued  for  as  small  an  amount  as  one  cent,  and 
many  municipalities  put  out  notes  for  a  few  cents,  redeem- 
able in  bank-notes  and  receivable  for  taxes. a  The  period 
following  the  war  was  one  of  prostration  in  the  United 
States  as  well  as  in  Great  Britain.  The  United  States  were 
for  a  short  time  importers  and  found  the  British  exporters 
eager  to  sell  because  of  the  excessive  stocks  they  had 
accumulated  in  anticipation  of  the  European  peace.  But 
importations  fell  off  as  the  American  people  discovered  the 
real  poverty  with  which  they  had  come  out  of  the  war. 
The  month  of  August,  1819,  found  20,000  persons  seeking 
employment  in  Philadelphia,  and  a  similar  condition  of 
affairs  in  the  other  great  cities  of  the  North. 3 

The  economic  disturbances  in  England  were  chiefly  mone- 
tary in  1817  and  1818,  but  were  intensified  by  scarcity  and 
the  high  prices  of  cereals.  The  monetary  difficulties  were 
due  to  the  steady  withdrawal  of  gold  for  foreign  coinages 
and  in  the  form  of  subscriptions  to  Prussian,  Austrian,  and 
French  loans.  The  sum  of  125,000,000  francs  in  gold  was 
coined  at  the  Paris  mint,  of  which  three- fourths  was  esti- 
mated to  have  been  drawn  from  England.  4  France,  in  the 
meantime,  was  paying  the  penalty  of  defeat  in  the  field. 
Commercial  affairs  were  brought  nearly  to  a  standstill  by 
the  entrance  of  the  Allied  armies  into  Paris  in  1814,  and 
they  suffered  another  period  of  enforced  liquidation  after 


1  Vide  p.  315. 

2  McMaster,  IV.,  297. 


3Sumner,  History  of  American  Currency ',  79. 
4Juglar,  327. 


THE  EARLY  CRISES  OF  THE  CENTURY.  475 

Napoleon's  return  from  Elba  in  March,  1815.  France  was 
obliged,  after  Waterloo,  to  issue  500,000,000  francs  of 
public  obligations  to  pay  the  war  contributions  imposed 
upon  her.  The  price  of  securities  fell  so  disastrously  that 
the  Minister  of  Finance  came  to  the  rescue  of  the  market 
and  loaned  freely  to  the  speculators,  in  order  to  maintain 
prices.  The  result  was  to  bring  the  securities  raining  upon 
the  Paris  market  and  to  increase  the  exportation  of  bullion.  * 
The  metallic  reserve  of  the  Bank  of  France  fell  from  117,- 
000,000  francs  on  July  i,  1818,  to  37,000,000  francs  on 
October  29th.  The  bank  shortened  the  term  of  commercial 
discounts  to  forty -five  days  and  in  1819  was  flooded  again 
with  idle  capital. 

The  Crisis  of  1825. 

The  next  great  crisis  which  shook  the  commercial  world 
attained  its  height  in  England  at  the  end  of  the  year  1825. 
The  metallic  reserve  of  the  Bank  of  England  steadily  in- 
creased from  1820  until  1823,  when  it  stood  at  ^"14, 100,000, 
while  the  circulation  was  reduced  until  it  stood  at  about 
^16,300,000.  The  Bank  was  required  by  the  Act  of  1819  to 
retire  its  ^5  notes  by  redeeming  them  in  gold  within  four 
years.  This  demand  for  gold,  comparatively  trifling  in  itself, 
was  accompanied  by  a  foreign  drain  due  to  the  immense 
loans  contracted  by  the  governments  of  Europe  and  Latin 
America  and  the  fever  of  speculation  in  domestic  and  Amer- 
ican companies  which  developed  in  England.  This  specula- 
tive mania  was  attributed  by  Mr.  J.  H.  Palmer,  the  Governor 
of  the  Bank  of  England,  to  the  reduction  of  the  interest  on 
government  securities.  He  said  to  the  Parliamentary  com- 
mittee of  inquiry  into  the  causes  of  the  crisis  : 

The  first  movement  in   that  respect   was,  I   think,  upon  ^135,000,- 

000  of  five  per  cents.,  which  took  place  in  1823.     In  the  subsequent 
year,  1824,  followed  the  reduction  of  ^80,000,000  of  four  per  cents. 

1  have  always  considered  that  reduction  of  interests,  one-fifth  in  one 
case,  and  one-eighth  in  the  other,  to  have  created  the  feverish  feeling 

1  Raffalovich,  Marche  Financier  en  1891,  9. 


HISTORY  OF  MODERN  BANKS   OF  ISSUE. 

in  the  minds  of  the  public  at  large,  which  prompted  almost  every- 
body to  entertain  any  proposition  for  investment,  however  absurd, 
which  was  tendered.  The  excitement  of  that  period  was  further  pro- 
moted by  the  acknowledgment  of  the  South  American  republics  by 
this  country,  and  the  inducements  held  out  for  engaging  in  mining 
operations,  and  loans  to  those  governments,  in  which  all  classes  of 
the  community  in  England  seem  to  have  partaken  almost  simultane- 
ously. With  those  speculations  arose  general  speculation  in  commer- 
cial produce,  which  had  an  effect  of  disturbing  the  relative  values 
between  this  and  other  countries,  and  creating  an  unfavorable  foreign 
exchange,  which  continued  from  October,  1824,  to  November,  1825, 
causing  a  very  considerable  export  of  bullion  from  the  bank,  about 
seven  millions  and  a  half.  * 

The  correctness  of  these  views  is  supported  by  the  phrensy 
of  speculation  which  seized  the  community.  The  new  re- 
publics of  Latin  America,  the  New  European  states  which 
had  been  carved  out  of  the  Empire  of  Napoleon,  and  the 
older  governments  which  had  incurred  heavy  war  expenses, 
appeared  in  the  London  market  as  borrowers  and  the  public 
loans  issued  within  four  years  were  estimated  at  nearly  ^50,- 
000,000.  Stock  companies  were  formed  with  objects  as 
indefinite  and  impracticable  as  in  the  time  of  the  South  Sea 
Bubble.  One  which  found  subscribers  proposed  to  drain  the 
Red  Sea  to  recover  the  gold  lost  by  the  Egyptians  when 
pursuing  the  Israelites.2  It  was  estimated  that  ^150,000,000 
of  British  money,  including  that  invested  in  government 
loans,  had  been  sunk  in  Mexico  and  South  America  alone/ 
Much  of  it  went  into  mining  shares,  which  advanced  fabu- 
lously during  1824  and  1825.  The  Real  del  Monte  shares, 
on  which  ^70  was  paid,  were  at  ^550  in  December,  1824, 
and  ,£1350  in  the  following  January.  The  first  payments 
required  did  not  usually  exceed  five  per  cent,  of  the  par  value 
of  the  shares,  so  that  the  humblest  were  able  to  count  upon 
enormous  dividends  from  very  trifling  investments.  The  num- 
ber of  stock  companies  created  was  computed  at  624,  calling 
for  a  nominal  capital  of  ^372, 173,100.  This  enormous 

1  Gilbart,  I.,  65. 

2  Juglar,  334. 

3  MacLeod,  Theory  and  Practice  of  Banking,  II.,  in 


THE   EARLY  CRISES  OF  THE   CENTURY.  477 

sum,  if  actually  paid  in,  would  have  required  $1,850,000,000 
of  capital,  and  in  the  England  of  that  day,  with  her  popula- 
tion of  13,000,000,  would  have  represented  an  investment  of 
nearly  $150  per  capita,  or  one-third  of  the  wealth  of  the 
country. 

The  withdrawal  of  so  much  capital  from  legitimate  com- 
mercial uses  as  was  actually  paid  into  these  companies  caused 
a  sharp  increase  in  the  value  of  money  and  the  prices  of 
commodities,  and  manufacturers  were  forced  to  borrow  money 
to  carry  on  their  ordinary  operations  at  the  increased  rates. 
The  rising  prices  in  the  latter  half  of  the  year  1825  reduced 
purchases,  the  warehouses  began  to  fill  and  the  owners  of 
merchandise  were  confronted  with  the  usual  dilemma  of  a 
commercial  crisis, — to  sell  their  goods  at  a  loss  or  make  new 
loans  at  higher  rates  of  discount.  The  coin  reserve  of  the 
Bank  of  England  steadily  declined  after  March,  1824,  when 
it  stood  at  ^"13,800,000,  until  it  reached  ^"9, 490,420  on  Janu- 
ary 29,  1825,  and  ,£6,659,780  at  the  end  of  April.  The 
reserve  had  been  forced  down  to  ,£3,012,150  on  November 
26th,  and  the  country  banks,  which  had  been  increasing  their 
discounts  and  their  note  issues,  were  suddenly  brought  to  a 
halt  by  the  failure  of  Sir  Peter  Pole  and  Co. ,  on  Monday, 
December  12,  1825.  Sixty-three  country  banks  were  forced 
to  suspend,  and  "  the  consequence,"  says  Mr.  Bagehot, 
"  was  a  panic.so  tremendous  that  its  results  are  well  remem- 
bered after  nearly  fifty  years. ' ' 

The  Bank  of  England  went  on  expanding  its  discounts  up 
to  the  end  of  April,  in  spite  of  an  adverse  foreign  exchange 
and  the  rapid  reduction  of  the  coin  reserve.  The  process  of 
contraction  began  in  May,  but  the  bank  did  not  raise  the  dis- 
count rate  until  the  panic  had  actually  broken.  It  was  not 
until  December  i3th,  that  they  advanced  the  rate  from  four 
per  cent,  to  five.  The  policy  of  contraction  during  the  first 
days  of  the  panic,  on  Monday  and  Tuesday,  caused  absolute 
paralysis  of  business.  Mr.  Huskisson  said  afterwards  in  the 
House  of  Commons  that  during  these  two  days,  "  It  was 
impossible  to  convert  into  money,  to  any  extent,  the  best 
securities  of  the  government."  The  usury  laws,  which 


478  HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

limited  the  rate  of  interest  outside  the  Bank  of  England  to 
five  per  cent.,  prevented  loans  of  private  capital,  which 
might  have  been  willingly  made  at  seven,  eight,  or  ten  per 
cent.  The  very  desperateness  of  the  situation  brought  its 
owTn  remedy  in  time  by  forcing  the  sale  of  commodities  at  a 
ruinous  loss,  which  brought  foreign  capital  pouring  back 
into  England  in  the  purchase  of  goods.  The  directors  of 
the  bank  changed  their  course  on  Wednesday,  enlarged 
their  issues  to  solvent  borrowers,  and  almost  in  a  moment 
the  panic  was  stayed  in  London. 

The  bank  issued  upwards  of  ,£5,000,000  in  notes,  between 
Wednesday  and  Saturday,  by  advances  on  stock  and  Ex- 
chequer bills  as  well  as  by  discounts, — in  the  language  of 
Mr.  Jeremiah  Harman,  one  of  the  directors,  "by  every  pos- 
sible means  consistent  with  the  safety  of  the  bank  ;  and  we 
were  not,  upon  some  occasions,  over-nice."  The  coin  in  the 
vaults  of  the  Bank  of  England  scarcely  exceeded  ,£1,000,- 
ooo  on  Saturday  night  of  this  eventful  week  and  the  influ- 
ence of  the  panic  had  not  been  fully  stayed  throughout  the 
country.  The  clamor  for  gold  was  stilled,  however,  by  the 
free  issue  of  notes  and  a  box  of  ,£1  notes  was  sent  down  into 
the  country.  The  Gurneys,  who  did  business  at  Norwich, 
displayed  piles  of  notes  many  feet  thick  on  their  counters 
and  prevented  a  run  by  the  confidence  which  this  exhibi- 
tion inspired.  The  aid  of  the  Bank  of  France  was  sought 
and  a  credit  for  ,£2,000,000  opened  on  three  months  bills.1 
The  sum  of  .£400,000  arrived  from  France  in  gold  on  Mon- 
day, the  i  Qth,  but  the  deputy  governor  of  the  Bank  of  Eng- 
land had  already  given  the  assurance  to  Lord  Liverpool  on 
Saturday  evening  that  the  danger  was  over  in  the  city  and 
that  quiet  would  soon  be  restored  in  the  country. 

The  crisis  of  1825  was  an  essentially  English  crisis,  be- 
cause loanable  capital  was  more  plentiful  in  England  than 
elsewhere  and  the  speculative  mania  was  mainly  confined  to 
the  London  market.  The  solidarity  of  the  world's  markets 
was  indicated,  however,  by  the  appeal  to  the  Bank  of  France 


1  Levi,  188. 


THE  EARLY  CRISES  OF  THE   CENTURY.  479 

and  by  the  reflex  influence  of  the  crisis  in  France  and  the 
United  States.  The  war  with  Spain  caused  some  curtail- 
ment of  commercial  opera tions^  in  France  in  1823  and  broke 
the  force  of  the  ascending  movement  of  business.  Much  of 
the  gold  expelled  from  England  by  unfavorable  exchanges 
found  its  way  into  the  Bank  of  France,  so  that  when  the  re- 
flex movement  of  the  English  crisis  was  felt  in  France  in  the 
demand  for  enlarged  discounts,  the  bank  had  an  ample  re- 
serve to  meet  it.  The  volume  of  discounts,  which  had  been 
478,000,000  francs  in  1824,  increased  to  638,000,000  in  1825 
and  688,000,000  in  1826,  and  fell  to  556,000,000  in  1827  and 
402,000,000  in  1828.  The  ebb  and  flow  of  the  commercial 
tide  followed,  therefore,  substantially  the  same  course  in 
France  as  across  the  channel,  but  without  such  an  acute  dis- 
turbance.1 The  rate  of  discount  was  maintained  uniformly 
at  four  per  cent. 

The  Crisis  of  ^£37-39. 

The  crisis  of  1837  was  felt  most  severely  in  the  United 
States,  but  over-speculation  in  banks  and  joint  stock  com- 
panies affected  Great  Britain  and  the  Continent,  and  Great 
Britain  was  affected  also  by  her  large  loans  in  America. 
There  were  symptoms  of  a  panic  in  England  in  1832,  but 
they  arose  from  political  events,  aggravated  by  bad  manage- 
ment of  the  Bank  of  England,  and  did  not  present  the  phe- 
nomena of  a  genuine  economic  crisis.  The  government 
undertook  the  conversion  of  the  public  debt  at  three  and  a 
half  per  cent,  and  the  disturbance  thus  caused  in  the  money 
market  was  complicated  with  the  expiration  of  the  charter 
of  the  bank  and  the  political  convulsions  on  the  Continent. 
The  reform  bill  was  pending  in  Parliament  and  the  masses 
were  irritated  against  Wellington  and  the  conservative  min- 
istry for  their  opposition.  The  circulation  of  the  Bank  of 
England  was  much  less  than  in  1825  (about  ^16,800,000), 
but  the  coin  reserve  had  been  allowed  to  fall  below  ,£5,000,- 
ooo.  The  attempt  to  create  a  political  run  upon  the  bank 

1  Juglar,  410. 


480         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

caused  alarm  for  a  time,  but  was  repressed  without  serious 
results. ' 

The  crisis  of  1837  'm  t^e  United  States  was  one  of  the  re- 
sults of  that  discounting  of*the  future  in  a  new  country, 
which  results  in  over-speculation  and  the  sinking  of  capital 
in  unproductive  enterprises.  Foreign  capital  became  available 
in  great  quantities  for  the  use  of  the  American  people  after 
the  recovery  from  the  crisis  of  1825  in  England,  and  specie 
imports  kept  company  with  an  excess  of  imports  of  merchan- 
dise, amounting  in  seven  years  to  $140,700,000,  as  evidence 
of  the  heavy  loans  which  Europe  was  willing  to  make  in  the 
United  States.2  The  fact  that  the  United  States  succeeded  in 
wiping  out  their  entire  public  debt  and  accumulating  a  sur- 
plus seemed,  among  the  financiers  of  European  countries, 
burdened  under  millions  of  debt  and  annual  interest  charges, 
to  be  a  proof  of  great  prosperity.3  The  success  of  the  Erie 
Canal  led  to  the  projection  of  many  similar  enterprises  in  the 
Middle  States  and  the  West ;  cities  were  laid  out  in  the  wil- 
derness, and  city  lots  sold  at  prices  which  in  conservative 
times  could  hardly  have  been  realized  in  New  York  and 
Philadelphia.  The  valuation  of  the  city  of  Mobile  in  1831 
was  $1,294,810;  it  rose  in  1837  to  $27,482,961,  only  to  fall 
in  1846  to  $8,638,250.*  The  price  of  cotton  was  pushed  up, 
and  negroes  became  as  active  a  subject  of  speculation  in  the 
South  as  the  timber  lands  of  Maine  in  the  North. 

1  Juglar,  342. 

2  The  excessive  purchases  of  foreign  goods,  which  did  not  have  to 
be  paid  for  in  either  merchandise  or  bullion,  is  shown  by  the  fact  that 
the  imports  from  Europe  increased  from  162,893,883  for  the  year  end- 
ing September  30,  1833,  to  $127,511,020  in  1836,  and  even  the  imports 
from  other  countries  increased  from  $38,154,060  to  $49,068,134.     This 
great  increase  in  consumption  was  offset  only  partially  by  the  in- 
crease in  exports  of  American  merchandise  to  Europe,  which  rose 
from  $56,556,837  in  1833  to  $96,413,449  in  1836,  while  other  exports 
slightly  fell  off.     The  reaction  was  striking  after  the  breaking  out  of 
the  crisis.     Imports  fell  during  the  year  ending  September  30,  1838, 
to  $62,017,575,  while  exports  from  the  United  States  to  Europe  fell 
only  to  $79,849,768. 

3  Juglar,  464. 

4  Shepard,  251. 


THE  EARLY  CRISES  OF  THE   CENTURY.  481 

Speculation  in  the  public  lands  ran  to  extravagant  limits. 
The  United  States  did  not  advance  the  price  of  public  lands 
beyond  one  dollar  and  a  quarter  per  acre,  which  had  been 
fixed  by  law  many  years  before.  The  speculators  bought 
of  the  government  at  this  fixed  price  and  sold  on  a  steadily 
rising  market.  The  increase  in  sales  of  public  lands  had 
been  comparatively  steady  and  healthful  up  to  1834,  when 
the  sales  were  4,659,218  acres  and  the  amount  received  was 
$6,099,981.  The  next  year  witnessed  the  sale  of  12,364,478 
acres  and  receipts  of  $15, 999, 804,  and  1836  witnessed  sales 
of  20,074,870  acres  and  receipts  of  $25,167,833.  The  specu- 
lative character  of  these  sales  is  indicated  by  the  steady 
decline  in  receipts  after  1837,  until  they  fell  in  1842  to  only 
$1,417,972.  :  President  Jackson  began  to  realize  in  1836  the 
true  character  of  the  rush  for  the  public  hands  and  en- 
deavored to  check  it  by  the  issue  of  the  famous  "  Specie 
circular."  The  circular  was  the  result  of  the  conclusion 
that  the  banks  organized  in  the  new  sections  of  the  West 
were  not  safe  enough  to  meet  the  requirement  of  existing 
law,  that  payments  for  lands  should  be  received  only  in 
specie  and  notes  of  specie  value.  These  banks  were  organ- 
ized in  many  cases  by  land  speculators,  who  issued  notes, 
borrowed  the  notes  and  bought  the  land.  The  notes  received 
for  sales  of  land  were  deposited  in  the  bank,  increasing  its 
resources,  and  were  then  borrowed  again  for  new  purchases 
of  land.  The  "Specie  circular,"  issued  July  n,  1836,  put 
an  end  to  this  by  requiring  payments  in  coin  or  land  scrip, 
except  until  December  i5th  by  actual  settlers  or  residents  of 
the  States  in  which  the  lands  were  situated. 

The  shriek  of  rage  which  was  uttered  by  the  defeated 
speculators  was  echoed  by  the  political  enemies  of  Jackson, 
and  the  legend  still  has  believers,  that  the  crisis  of  1837  was 
the  result  of  no  other  causes  than  the  specie  circular  and  the 
deposit  of  public  funds  in  State  banks  instead  of  the  Bank  of 
the  United  States.  The  events  connected  with  the  discon- 
tinuance of  deposits  in  the  Bank  of  the  United  States  and 


1  Poor,  528. 

31 


482          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

the  veto  of  the  charter 3  undoubtedly  caused  some  degree  of 
financial  uneasiness  at  the  time,  but  the  causes  of  the  crisis 
of  1837  lay  deeper  than  merely  political  events.  The  infla- 
tion of  credit  which  has  been  attributed  by  some  to  the 
distribution  of  the  public  monies  among  the  State  banks 
had  already  begun  before  the  transfers  were  made,  and  the 
inflation  would  have  been  trifling  if  it  had  been  limited  to  the 
amount  of  the  deposits  at  the  time.  The  deposits  were  then 
only  $10,000,000,  and  it  is  obvious  that  they  would  not  have 
been  a  large  factor  in  a  healthy  money  market  and  were  a  still 
smaller  factor  in  a  period  of  inflated  values  and  extravagant 
speculation.  The  deposits  increased,  however,  from  $10,000,- 
ooo  in  1823  to  $41,500,000  in  1836. 

Congress  added  fuel  to  the  speculation,  and  greatly  em- 
barrassed the  Treasury  when  the  crisis  came,  by  the  policy 
of  distributing  the.  surplus  revenues  among  the  States. 
Tariff  reductions,  although  recommended  by  President  Jack- 
son, were  not  made  with  sufficient  rapidity  to  prevent  the 
accumulation  of  a  surplus,  which  amounted,  on  January  i, 
1836  to  $26,749,803.  This  surplus  and  subsequent  accumu- 
lations up  to  January  i,  1837,  reserving  $5,000,000  for  the 
government,  were  ordered  by  the  Act  of  June  23,  1836,  to 
be  ' '  deposited ' '  with  the  several  States  in  proportion  to 
their  representation  in  Congress.  Jackson  had  favored  a 
distribution  in  1829,  *  but  in  1836  had  come  to  see  the 
dangers  of  the  plan  and  only  reluctantly  permitted  the  bill 
to  become  a  law.  A  new  element  of  disturbance  was  pro- 
jected into  the  financial  situation  by  the  coinage  Act  of  1834, 
which  changed  the  ratio  of  value  of  gold  and  silver  from 
fifteen  to  one  to  sixteen  to  one,  in  order  to  promote  the 
circulation  of  gold. 3  It  was  the  desire  of  President  Jackson 
and  Senator  Benton  to  create  a  metallic  currency,  in  place 
of  a  bank-note  currency  resting  upon  insecure  foundations, 
and  it  was  provided,  in  the  bill  authorizing  the  deposit  of 

1  Videch.  xiii. 

-  Knox,  169. 

3  The  measure  was  designed  to  make  a  market  for  the  gold  which 
was  then  being  mined  in  considerable  quantities  in  the  Southern 
Appalachian  range. 


THE   EARLY  CRISES  OF  THE   CENTURY.  483 

the  surplus  with  the  States,  that  each  of  the  deposit  banks 
should  redeem  its  notes  in  specie  and  should  issue  no  notes 
after  July  4,  1836,  of  a  lower  denomination  than  $5.  The 
adoption  of  a  coinage  system  which  sent  silver  to  a  premium 
over  gold,  at  the  same  moment  that  it  was  proposed  to 
exclude  small  notes  from  circulation,  threatened  to  leave  the 
country  without  a  medium  for  small  payments,  but  the 
breaking  out  of  the  crisis  and  the  suspension  of  specie  pay- 
ments suspended  the  operation  of  the  new  conditions  before 
any  considerable  amount  of  gold  had  found  its  way  into 
circulation. 

Omens  of  trouble  were  already  in  the  air  in  the  opening 
months  of  1837.  Popular  meetings  were  held  in  New  York 
for  the  purpose  of  protesting  against  the  high  prices  of 
provisions  and  the  undue  inflation  of  bank  credits.  One  of 
these  meetings,  on  February  i4th,  became  riotous,  a  flour 
warehouse  was  gutted,  and  the  military  were  called  out  to 
preserve  order.1  The  commercial  crash  was  delayed  until 
April.  The  news  from  England  indicated  a  financial 
stringency  there  which  was  soon  felt  in  the  United  States. 
One  hundred  and  twenty-eight  failures  occurred  in  New 
York  between  April  i  stand  April  nth,  cotton  fell  nearly  fifty 
per  cent.,  the  banks  of  New  York  suspended  specie  pay- 
ments on  May  loth,  and  the  banks  throughout  the  country 
which  had  not  already  fallen  followed  the  example  of  New 
York  within  a  few  days.  The  deposit  banks  ceased  to  pay 
specie,  the  public  revenues  fell  off,  further  deposits  of  public 
monies  with  the  States  were  suspended,  and  on  May  i5th 
President  Van  Buren  called  an  extra  session  of  Congress  for 
September. 2 

1  Shepard,  270. 

2  The  New  York  batiks  resumed  specie  payments  on  May  10,  1838, 
and  most  of  the  other  banks  of  the  country  followed  on  July  ist. 
Early  resumption  was  strongly  championed  by  ex-Secretary  Albert 
Gallatin,  then  President  of  the  National  Bank  of  New  York,   who 
was  chairman  of  a  committee,  appointed  by  the  New  York  banks  as 
early  as  August  15,  1837,  to  confer  on  the  subject  with  the  bankers 
of  other  cities.     The  New  York  banks  would  probably  have  resumed 
much  earlier,  but  for  the  dilatory  policy  of  the  United  States  Bank  of 
Pennsylvania. — Stevens,  282-85. 


484         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

An  important  incident  of  the  crisis,  which  affected  seriously 
the  Southern  States  and  European  investors,  was  the  great 
speculation  of  President  Biddle  of  the  United  States  Bank 
of  Pennsylvania  in  cotton.  He  undertook  to  corner  the 
cotton  product  of  the  world  by  arranging  with  the  merchants 
to  make  all  their  consignments  to  the  agents  of  the  bank 
at  Havre  and  Liverpool.  He  drew  bills  on  England  in 
1837  against  cotton  for  ,£3, 000,000,  and  expected  to  get  the 
benefit  of  the  difference  between  the  rates  at  which  he 
loaned  in  the  United  States — five  and  six  per  cent. — and 
the  English  rate  of  two  per  cent.  But  the  United  States 
Bank  no  longer  controlled  the  supply  of  commercial  credit, 
and  the  fabulous  profits  which  Biddle  appeared  to  be  realiz- 
ing stimulated  the  creation  of  banks  all  through  the  cotton 
belt,  which  made  advances  to  the  planters  and  undertook  to 
sell  cotton  on  their  own  account  in  Europe.  The  rise  of  the 
Bank  of  England  discount  rate  suddenly  curtailed  the  profits 
of  many  of  these  banks  and  the  Bank  of  the  United  States 
went  to  their  rescue  in  order  to  maintain  the  price  of  cotton. 
Bank  shares  and  commercial  paper  were  purchased  by  Biddle 
at  a  discount  of  more  than  twenty-five  per  cent.,  which  were 
thrown  upon  the  European  market  and  eagerly  snatched  up 
at  par  by  European  investors,  who  had  not  discovered  the 
tottering  condition  of  American  finance.  But  the  enterprise 
was  too  vast,  even  for  Biddle' s  resources.  The  reserves  of 
cotton  were  brought  out,  old  stocks  in  the  hands  of  manu- 
facturers were  allowed  to  run  down,  consumption  diminished 
and  mills  reduced  their  output,  while  bale  upon  bale  con- 
tinued to  pour  upon  the  Liverpool  and  Havre  markets. 
The  House  of  Hottinguer  of  Paris  protested  Biddle' s  paper, 
the  Hopes  of  Amsterdam  broke  off  relations  with  him,  and 
the  price  of  cotton  tumbled,  in  common  with  that  of  other 
commodities.1 

Speculation  in  banks  and  joint  stock  companies  had 
reached  a  serious  point  in  England,  irrespective  of  large 
English  investments  in  America.  The  growth  of  the  specu- 


Juglar,  462-65. 


THE  EARLY  CRISES  OF  THE   CENTURY.  485 

lative  spirit  did  not  escape  the  attention  of  shrewd  j  udges  of 
the  situation,  and  Lord  Wharncliffe  as  early  as  August  14, 
1834,  called  attention  in  Parliament  to  the  extension  of  joint 
stock  banks  and  the  insufficient  capital  with  which  they 
were  trading.1  The  matter  was  made  the  subject  of  a  Parli- 
amentary inquiry  in  May,  1836.  Mr.  Poulett  Thompson, 
President  of  the  Board  of  Trade,  took  part  in  the  debate 
and  said  that  he  had  kept  a  register  4<  of  the  different  joint 
stock  companies,  and  of  the  nominal  amount  of  capital  pro- 
posed to  be  embarked  in  them.  The  nominal  capital  to  be 
raised  by  subscription  amounts  to  nearly  ^200,000,000  and 
the  number  of  companies  to  between  300  and  400."  "  The 
greater  part  of  these  companies,"  Mr.  Thompson  observed, 
14  are  got  up  by  speculators,  for  the  purpose  of  selling  their 
shares.  They  bring  up  their  shares  to  a  premium,  and  then 
sell  them,  leaving  the  unfortunate  purchasers,  who  are  foolish 
enough  to  invest  their  money  in  them,  to  shift  for  themselves." 
The  most  extravagant  expectations  of  railway  profits  and 
of  mining  profits  absorbed  private  capital  and  were  pre- 
paring the  way  for  a  crash,  when  the  failure  of  the  wheat 
crop  in  1836  inaugurated  a  drain  of  gold  from  the  Bank  of 
England. 

The  bullion  in  the  bank  in  March,  1836,  exceeded  ^8,000,- 
ooo.  From  this  date  it  steadily  declined,  but  it  was  not 
until  July  that  the  bank  raised  the  discount  rate  to  four  and 
a  half  per  cent,  and  in  August  to  five  per  cent.  The  Agricul- 
tural and  Commercial  Bank  of  Ireland  failed  in  November, 
and  a  run  began  upon  the  other  Irish  banks.  They  had 
strengthened  themselves  by  drawing  gold  from  the  Bank  of 
Kngland  to  the  amount  of  ^"2,000,000  and  were  able  to  pay 
specie  on  demand,  but  the  distrust  was  so  great  that  Bank  of 
Kngland  notes  were  taken  by  the  Bank  of  Ireland  only  in 
small  amounts  and  at  a  discount  of  two  shillings  and  six- 
pence in  the  pound.  The  Northern  and  Central  Bank  at 
Manchester,  with  a  capital  of  ^800,000  and  with  forty 
branches,  appealed  to  the  Bank  of  England  for  help  in 


MacLeod,  Theory  and  Practice  of  Banking,  II.,  137. 


486          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

December,  and  it  was  only  granted  on  condition  that  the 
institution  should  discontinue  all  its  branches  except  at 
Liverpool,  and  afterwards  that  it  should  discontinue  business 
after  February,  1837.'  The  bank  was  more  liberal  to  some 
of  the  large  houses  with  American  connections  and  eventu- 
ally aided  them  to  the  amount  of  ,£6,000,000. 

The  latter  half  of  the  year  1837  and  the  year  1838  showed 
an  increase  of  the  cash  reserve  of  the  Bank  of  England  and 
a  reduction  in  the  discounts  and  circulation.  The  access  of 
gold  to  Bngland,  however,  was  due  to  the  abuse  of  credit  in 
America,  France,  and  Belgium  and  did  not  indicate  a  return 
of  sound  conditions  at  home.  Notwithstanding  the  danger, 
the  Bank  of  England  lowered  its  discount  rate,  November 
29,  1838,  from  four  to  three  and  a  half  per  cent,  and  an 
increase  to  five  percent,  on  May  16,  1839,  was  insufficient  to 
arrest  the  downward  course  of  the  reserve.  The  suspension 
of  specie  payments  again  stared  the  bank  in  the  face,  offers 
were  made  to  sell  annuities,  some  public  stocks  were  sold, 
and  drafts  were  made  upon  Paris  for  ,£600,000  in  bills  of 
exchange.  The  bank  was  unable  to  reimburse  these  drafts 
when  they  matured  and  foreign  bankers  began  to  draw 
upon  London  for  coin.  Messrs.  Baring  and  Company  came 
to  the  rescue  and  made  an  agreement  with  several  bankers 
of  Paris  to  accept  bills  of  exchange  to  the  amount  of 
,£2,000,000.  A  like  arrangement  with  the  bankers  of  Ham- 
burg procured  ,£900,000  more,  and  on  September  2,  1839, 
when  the  coin  and  bullion  were  at  .£2,406,000,  the  decline 
was  arrested. 

The  Bank  of  France  was  fortunately  in  a  position  to  meet 
these  demands  in  1839,  for  its  own  coin  reserve  had  increased 
in  January  to  214,000,000  francs  ($41,400,000).  It  would 
have  been  less  easy  to  spare  gold  at  an  earlier  date,  for  the 
bank  had  only  105,000,000  francs  ($20,000,000)  in  its  reserve 
in  January,  1837,  an<^  demands  for  discounts  were  rapidly 
increasing  from  Paris  and  the  country.  The  bank  was  com- 
pelled to  buy  8,000,000  francs  in  gold  and  to  import  10,000,- 


1  Gilbart,  I.,  314. 


THE  EARLY  CRISES  OF   THE   CENTURY.  487 

ooo  francs  in  gold  bullion.1  The  crisis  was  less  severe  in 
France  than  in  England  and  the  Bank  of  France  was  able, 
at  some  risk  to  commerce,  to  maintain  the  uniform  discount 
rate  of  four  per  cent.2  The  demand  for  coin  and  for  in- 
creased discounts  came  mostly  from  the  interior  of  France 
and  while  the  gold  flowed  rapidly  from  the  bank  into  the 
provinces  in  1836,  it  flowed  almost  as  rapidly  back  in  the 
second  half  of  1837.  The  suspension  of  the  Bank  of  Bel- 
gium in  November,  1838,  and  the  disasters  in  the  United 
States  led  to  an  increased  demand  for  accommodation  from 
the  Bank  of  France  and  discounts  rose  from  103,000,000 
francs  in  June,  1838,  to  228,000,000  francs  in  January,  1839, 
but  legitimate  demands  were  met  without  impairing  the 
coin  reserve. 

The  Crisis  of 


The  crisis  of  1847  was  so  severely  felt  in  Great  Britain 
and  France,  on  account  of  the  failure  of  their  crops,  that 
they  were  driven  to  pour  their  gold  and  silver  into  the  lap 
of  the  United  States  in  the  purchase  of  her  bounteous  har- 
vests, and  the  year  was  for  her  one  of  unusual  prosperity. 
The  value  of  the  exports  of  merchandise  from  the  United 
States  for  the  fiscal  year  1847  was  $T  5^,74  1,598,  an  increase 
of  more  than  forty  per  cent,  over  any  preceding  year  ;  the 
excess  of  exports  over  imports  was  $34,317,249,  a  balance 
never  again  attained  until  1876  ;  and  the  imports  of  gold 
and  silver  were  $21,574,931,  —  a  total  which  stood  substan- 
tially unchallenged  until  shortly  before  the  resumption  of 
specie  payments  in  1879.  This  great  prosperity  on  the 
western  shore  of  the  Atlantic  was  obtained  at  the  expense 
of  fever,  starvation,  and  death  on  the  eastern  shore.  A  long 
season  of  rain  and  wet  rotted  the  entire  potato  crop  of  Ire- 
land in  1845  and  1846  and  destroyed  the  food  of  a  people. 
The  Irish  peasant,  who  had  no  other  means  of  living,  was 
dying  literally  by  tens  of  thousands  among  the  marshes  and 
hovels  of  his  native  land.  Coffins  could  no  longer  be  pro- 


,  414. 
Courtois,  159. 


488          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

vided  in  some  districts  and  the  coroner  refused  to  go  on  hold- 
ing inquests.  The  population  of  Ireland  was  found  when 
the  famine  was  over  to  have  shrunken  by  death  and  emigra- 
tion from  eight  millions  to  six  millions.1  Three-quarters  of 
a  million  of  Irish  immigrants  reached  the  United  States  in 
the  decade  ending  with  1850  and  nearly  a  million  followed 
in  the  next. 

The  great  demand  for  gold  to  pay  for  foreign  grain  was 
the  immediate  occasion  of  the  crisis  of  1847,  but  there  had 
been  also  a  great  transformation  of  circulating  into  fixed 
capital  in  the  building  of  railways,  and  the  effect  of  the  ex- 
port of  gold  was  much  intensified  in  England  by  the  opera- 
tion of  the  Bank  Act  of  1844.  This  act  did  not  accomplish 
its  original  purpose,  to  contract  domestic  circulation  in  the 
exact  measure  of  the  export  of  bullion.  Had  it  done  so, 
the  effect  would  have  been  even  more  disastrous  than  was 
actually  the  case  ;  but  it  accomplished,  at  a  time  when  it 
was  too  late  to  arrest  speculation,  a  needless  pressure  upon 
the  money  market  and  a  sharp  contraction  of  discounts. 
The  railway  mania  steadily  spread  in  Great  Britain  for 
several  years.  New  railway  capital  was  authorized  by  Par- 
liament in  three  years  to  the  amount  of  ^221,000,000  and 
the  amount  actually  expended  on  railways  in  two  and  a  half 
years  was  computed  at  ^76, 390,000. 2  The  countries  of  the 
Continent  had  followed  Great  Britain  in  railway  expansion. 
Belgium  in  1845  had  343  miles  of  railway,  built  at  a  cost  of 
$29,000,000  ;  France  552  miles,  at  a  cost  of  $51,000,000,  with 
1900  miles  projected  at  a  cost  of  $150,000,000  ;  Germany, 
2000  miles  at  a  cost  of  $77,000,000,  with  2300  miles  pro- 
jected ;  and  the  United  States,  3688  miles  at  a  cost  of  $88,- 
000,000,  with  5624  miles  under  construction  at  an  estimated 
cost  of  $ 1 34, ooo, ooo. 3  The  effect  of  this  great  absorption  of 
the  savings  of  the  community  in  a  single  class  of  enterprises 
was  illustrated  in  an  incidental  way  when  Parliament  in 
1846  required  all  railway  companies  intending  to  apply  for 

1  McCarthy,  I.,  278-82. 

2  Report  of  the  Lords'  Committee,  Gilbart,  I.,  337-38. 

3  Levi,  303-304. 


THE  EARLY  CRISES  OF   THE  CENTURY.  489 

incorporation  to  lodge  ten  per  cent,  of  their  capital  within 
fifteen  days  after  the  beginning  of  the  Parliamentary  session. 
It  was  feared  that  the  notes  issued  under  the  Bank  Act  of 
1844  would  prove  insufficient  to  make  these  payments  and  it 
was  arranged  that  the  ,£14,000,000  found  to  be  required 
should  be  obtained  by  daily  payments  deposited  in  the  Bank 
of  England  and  immediately  loaned  out  again  for  further 
payments.1 

The  harvests  of  1842,  1843,  anc*  1844  were  abundant,  large 
savings  were  made  by  the  British  nation,  the  quantity  of 
capital  required  to  be  invested  in  goods  in  stock  was  re- 
duced by  improvements  in  the  means  of  transit,  and  bullion 
rapidly  accumulated  in  the  Bank  of  Kngland.  Discount 
rates  at  the  bank  fell  as  low  as  one  and  three-quarters  per 
cent,  on  the  best  bills  and  after  some  fluctuations  stood  at 
three  per  cent,  from  August,  1846,  to  January  16,  1847. 
The  failure  of  the  potato  crop  in  Ireland  in  1845,  followed 
by  a  worse  failure  in  1846,  required  the  exportation  of  large 
quantities  of  bullion  to  pay  for  foreign  grain,  and  the  bullion 
holdings  of  the  bank  decreased  from  ,£15, 163,000  on  Decem- 
ber 19,  1846,  to  ,£9,867,000  on  April  10,  1847.  The  bank- 
ing reserve  in  the  meantime  had  fallen  from  ,£8,864,000  to 
,£2,558,000.  A  panic  stared  the  market  in  the  face  for  a 
moment  and  discount  among  private  bankers  rose  to  ten  and 
twelve  per  cent.  The  rise  in  the  bank  rate,  however,  stopped 
the  flow  of  bullion  and  a  sum  of  ,£100,000  which  had  been 
actually  put  on  shipboard  for  America  was  relanded.2  The 
pressure  passed  off  for  a  time  and  the  bullion  in  the  bank  at 
the  end  of  June  had  increased  to  ,£10,526,000  and  the  bank- 
ing reserve  to  £"5,625,000. 

The  relief  was  only  temporary.  A  series  of  heavy  failures 
came  crowding  on  each  other's  heels  in  August,  involving 
liabilities  of  £  1,200,000  in  the  week  ending  August  i6th  and 
,£15,000,000  by  the  end  of  October.  Saunderson  and  Co.,  a 
leading  firm  of  bill  brokers,  stopped  payment  in  the  middle 


1  Gilbart,  L,  343- 

2  MacLeod,  Theory  of  Credit,  II.,  796. 


490         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

of  September,  heavily  involved  with  leading  houses  in  the 
corn  trade.  Firms  in  the  India  trade  were  crippled  by  the 
long  credits  afforded  and  were  compelled  to  suspend.  Mer- 
chants whose  own  business  was  sound  were  ruined  by  their 
reckless  speculations  in  railroad  securities.  The  directors 
of  the  Bank  of  England  realized  that  heroic  measures  were 
required  to  save  the  bank  and  on  October  2,  1847,  advanced 
the  bank  rate  to  five  and  a  half  per  cent,  and  refused  to 
make  advances  on  stock  or  on  Exchequer  bills.  The  bullion 
had  fallen  again  to  ,£8,565,000  and  the  banking  reserve  to 
,£3,409,000.  The  refusal  to  make  advances  on  public  securi- 
ties caused  wild  excitement  on  the  stock  exchange,  a  fall  in 
the  price  of  Consols,  and  the  disappearance  of  coin  and 
bank-notes  into  private  hoards.  The  Bank  of  England  was 
reduced  to  the  choice  of  bringing  business  to  a  standstill,  by 
refusing  all  further  discounts  and  pulling  down  the  entire 
commercial  structure  in  a  shapeless  mass  of  ruins,  or  break- 
ing through  the  shackles  placed  upon  its  action  by  the  Bank 
Act  of  1844. 

The  government  waited  until  the  situation  was  desperate, 
in  the  hope  that  the  pressure  would  pass  away,  as  that  of 
April  had  done,  without  the  necessity  for  suspending  the 
law.  The  reserve  dropped  to  ,£1,176,000  and  the  govern- 
ment finally  acted,  late  on  Saturday,  October  23d,  and  notified 
the  bank  that  they  would  seek  a  bill  of  indemnity  from 
Parliament  if  notes  were  issued  in  excess  of  the  limit  im- 
posed by  the  Act  at  a  rate  of  discount  not  less  than  nine  per 
cent.  The  effect  was  magical.  The  knowledge  that  money 
might  be  had  to  meet  demands  instantly  destroyed  the 
desire  for  it.  The  bank  prepared  ,£400,000  in  additional 
notes,  but  it  was  not  found  necessary  to  issue  them.  Notes 
which  had  been  hoarded,  under  the  impression  that  the 
limit  of  issues  fixed  by  the  Act  would  soon  be  reached  and 
all  relief  cut  off  from  the  business  community,  came  pouring 
from  their  hiding  places  ;  gold  which  had  been  stored  in 
safe  deposit  vaults  was  brought  back  to  the  banks  for  deposit, 
and  both  the  bullion  and  the  banking  reserve  of  the  Bank 
of  England  rapidly  returned  to  safe  proportions. 


THE  EARLY  CRISES  OF   THE   CENTURY.  491 

France  suffered  less  keenly  than  England  in  1846  from  the 
insufficiency  of  the  crops,  but  the  exportation  of  bullion, 
under  the  demands  of  the  London  market  and  in  payment 
for  grain,  carried  the  reserve  of  the  Bank  of  France  down 
from  252,000,000  francs  on  July  i,  1846,  to  80,000,000  francs 
on  January  i,  1847.  The  bank  was  besieged  for  discounts, 
purchased  gold  and  silver  in  the  provinces  at  a  premium,  and 
sold  20,000,000  francs  in  French  securities  to  the  Barings 
of  London  for  gold.  The  crisis  was  so  intense  that  the 
management  of  the  bank  decided  on  January  14,  1847,  for 
the  first  time  in  twenty-seven  years,  to  raise  the  rate  of 
discount  from  four  to  five  per  cent.  The  outflow  of  specie 
ceased  and  the  reserve  rose  from  78,000,000,000  francs  on 
January  i5th  to  1 10,000,000  francs  on  March  i6th.  The  Em- 
peror of  Russia  came  to  the  rescue  of  the  bank  and  offered 
to  buy  French  public  securities  to  the  amount  of  50,000,000 
francs.1  The  bank  accepted  the  offer  and  these  securities 
went  to  Russia  in  payment  for  grain  in  place  of  the  bullion 
which  would  otherwise  have  been  exported.  It  was  well 
understood  in  France  that  the  efflux  of  gold  was  due  to 
foreign  payments  and  there  was  no  disposition  to  present 
bank-notes  for  redemption  in  specie  for  domestic  use.2  The 
bank  was  so  well  equipped  with  bullion  and  confidence  was 
so  fully  restored  that  France  was  little  affected  by  the  autumn 
pressure  in  England  and  discount  was  reduced  on  December 
27,  1847,  to  tne  standard  rate  of  four  per  cent.  The  break- 
ing out  of  the  revolution  of  1848  arrested  the  development 
of  business,  and  led  the  bank  to  seek  the  suspension  of 
specie  payments  by  authority  of  the  government  for  the 
protection  of  its  metallic  reserve.  The  accumulation  of 
bullion  was  unprecedented  from  1848  to  1851  and  attained 
on  October  2,  1851,  626,000,000  francs,  which  was  about 
20,000,000  francs  in  excess  of  the  entire  circulation  of  bills. 


1  Noel  I.,  in.  The  negotiations  were  opened  by  the  Russian 
ambassador  at  Paris,  Count  Kisselef,  and  a  deputy  governor  of  the 
bank  went  to  St.  Petersburg  to  conclude  the  transaction.  The  con- 
tract was  signed  March  17,  1847. 

2Juglar,  417. 


CHAPTER  XXI. 

THE   LATER   CRISES  OP  THE   CENTURY. 

Growth  in  the  Popular  Understanding  of  Crises — The  Effect  of  the 
Gold  Discoveries  and  Railway  Building  in  1857  and  1866 — The 
Failure  of  Overend,  Gurney,  and  Co.  in  1866,  and  of  the  Barings 
in  1890 — The  Economic  Effects  of  the  American  and  Franco- 
Prussian  Wars  and  the  Long  Period  of  Depression  from  1873  to 
1879. 

THE  economic  crises  of  the  closing  half  of  the  nine- 
teenth century  have  been  of  wider  extent  than  some 
of  the  earlier  crises,  because  of  the  wider  area  of 
modern  commerce,  and  the  suffering  which  they  have  in- 
flicted has  been  keen  ;  but  they  have  possessed  fewer  of 
the  characteristics  of  unreasoning  panic  than  the  earlier 
crises  of  the  century,  because  of  the  more  accurate  compre- 
hension of  the  laws  of  banking  which  has  been  diffused  in 
the  business  community.  The  panic  in  England  was  less 
intense  in  1857  than  in  1847,  and  the  serious  dangers  of  the 
Baring  failure  in  1890  were  warded  off  by  the  union  of  the 
Bank  of  England  and  the  great  financial  houses,  without 
any  outbreak  of  visible  alarm.  The  United  States  in  1893 
passed  through  an  equally  trying  experience,  and  runs  upon 
the  banks  by  depositors  were  several  times  feared,  but  no 
such  runs  took  place  except  in  cases  where  there  were  well- 
founded  reasons  for  distrust. 

The  Crisis  0/1857. 

The  crisis  of  1857  took  its  direction  from  two  of  the  car- 
dinal events  of  the  nineteenth  century, — the  gold  discoveries 

492 


THE  LATER   CRISES  OF   THE  CENTURY.  493 

in  California  and  Australia  and  the  great  extension  of  rail- 
ways. The  gold  discoveries  worked  a  revolution  in  the  pro- 
portions of  the  precious  metals  available  for  monetary  uses, 
.such  as  had  only  been  worked  by  the  discoveries  of  the 
treasures  of  Mexico  and  Peru  more  than  three  centuries 
before.  The  gold  product  of  358  years,  from  1492  to  1850, 
had  averaged  only  about  $9,000,000  per  year,  1  when  it  was 
suddenly  swelled  to  an  average  of  $133,000,000  from  1851  to 
1860.  President  Buchanan  estimated  the  production  of  the 
United  States  alone  for  the  eight  years  ending  in  1857  at 
$400,000,000.  Prices  did  not  advance  in  proportion  to  the 
increase  in  the  volume  of  metallic  money,  because  they  were 
regulated  by  credit  and  because  a  large  part  of  the  new 
money  was  absorbed  by  the  lateral  expansion  of  commerce 
in  quantity,  but  enterprises  of  all  kinds  received  a  stimulus 
unheard  of  in  the  history  of  the  world. 

To  this  influence  of  the  doubling  of  the  supply  of  the  pre- 
cious metals,  as  if  by  magic,  was  added  the  influence  of  rail- 
way extension.  The  railway  mileage  built  in  the  United 
States  in  1856  was  3642  miles, a  and  the  construction  for  the 
nine  years  ending  with  1857  was  21,000  miles.  This  con- 
struction, forming  seven-ninths  of  the  entire  mileage  of  the 
country,  had  absorbed  $700,000,000,  largely  in  foreign  capi- 
tal. England  and  the  Continent  had  witnessed  a  similar 
absorption  of  circulating  capital.  Over  four  thousand  miles 
of  railway  had  been  built  in  England  since  1850  at  an  ex- 
pense of  ^150,000,000,  doubling  the  mileage  of  the  country.3 
So  rapid  was  the  development  in  every  branch  of  American 
life  that,  in  the  language  of  Professor  Von  Hoist,  "It  was 


1  Prof.  Adolph  Soothbeer  gives  the  aggregate  production  from  1493 
to  1850  as  13,258,000,000  marks  ($3,150,000,000),  and  from  1851  to  1885 
as  17,810,000,000  ($4,250,000,000). — Bimetallism  in  Europe,  Sen.  Ex. 
Doc.  34,  5oth  Cong.,  ist  Sess.,  78.  The  production  from  1885  to  Dec. 
31,  1895,  was  about  $1,375,000,000. 

*  Sumner,  History  of  American  Currency,  180. 

3  These  figures  are  taken  from  Mr.  Rhodes'  History  of  the  United 
States  (HI.,  53),  who  has  made  a  careful  compilation  of  the  essential 
facts  of  the  crisis  in  this  country. 


494          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

more  and  more  lost  sight  of,  that  even  in  the  age  of  steam, 
time  must  remain  an  essential  factor  in  every  process  of  de- 
velopment." It  no  longer  seemed  absurd  to  project  railways 
into  the  wilderness,  in  the  confident  belief  that  they  would 
open  up  new  countries  and  create  traffic  where  none  existed. 
Immigration  lent  its  aid  to  the  natural  growth  of  population, 
and  the  American  people,  under  these  combined  influences, 
"worked  themselves  deeper  and  deeper  into  the  delusion 
that  the  fancy  could  scarcely  keep  pace  with  the  reality,  and 
were  thus  led  to  mould  the  reality  in  their  minds  in  accor- 
dance with  what  imagination  pictured  to  them." 

There  were  signs  of  a  tight  money  market  in  both  the 
United  States  and  England  for  several  years  before  1857. 
Bad  crops  and  the  diminution  of  foreign  investments  caused 
uneasiness  among  the  Western  banks  as  early  as  the  summer 
of  1853.  They  drew  heavily  upon  their  balances  in  New 
York  to  replace  the  capital  sunk  in  railway  enterprises,  and 


1  Von  Hoist,  VI.,  104.  It  was  argued  at  the  time  of  the  panic  of 
1857,  and  has  been  maintained  since,  that  the  crash  was  caused  by 
the  low  tariff  of  1846,  which  led  to  large  exports  of  specie  to  make 
payments  for  foreign  goods  and  drained  the  country  of  metallic  money. 
Mr.  Rhodes,  who  will  not  be  accused  of  partiality  to  the  administra- 
tion of  either  Polk  or  Buchanan,  says  that  "  in  this  reasoning  cause 
and  effect  are  confused,  and  in  part,  at  least,  inverted.  It  was  the  ex- 
port of  specie  which  increased  the  importations  of  merchandise,  and 
not  the  importations  of  merchandise  which  increased  the  export  of 
specie."  He  shows  that  during  the  nine  years  ending  June  30,  1857, 
the  excess  of  the  exports  of  specie  over  imports  was  1271,000,000,  and 
that  during  the  same  period  there  was  a  production  of  gold  in  the 
United  States  of  about  $477,500,000,  leaving  a  net  increase  of  specie 
of  about  $206,000,000.  The  net  increase  in  specie  in  circulation  shown 
by  the  Treasury  estimates  during  this  period  was  only  $148,000,000, 
the  remainder  having  been  absorbed  in  the  arts,  but  this  amount  was 
more  than  sufficient  for  American  monetary  uses,  and  such  export  of 
specie  as  occurred  probably  tended  to  restrain  speculation  rather  than 
stimulate  it.  Mr.  Rhodes  expresses  his  obligations  for  this  part  of  his 
history  to  Prof.  Edward  G.  Bourne  of  Adelbert  College. — History  of 
the  United  States,  III.,  51-52.  Prof.  Max  Wirth,  the  eminent  Ger- 
man historian  of  economic  crises,  makes  no  mention  of  the  tariff 
among  the  causes  of  the  crisis  of  1857. 


THE  LATER   CRISES  OF   THE    CENTURY.  495 

many  were  compelled  to  suspend  payment.  The  Crimean 
War  led  to  speculation  in  shipping  in  England  and  some 
perturbation  in  business  circles.  The  anticipation  of  trouble, 
however,  as  the  result  of  the  war,  made  money  lenders  cau- 
tious and  prevented  serious  embarrassment  until  the  summer 
of  1855.  The  Bank  of  England  in  that  year  suffered  a  seri- 
ous drain  of  bullion,  which  carried  its  supply  down  from 
^18,169,000011  June  23d  to  ^11,752,300  on  October  i3th. 
This  drain  continued,  in  spite  of  advances  in  the  discount 
rate  by  successive  steps,  from  three  and  a  half  per  cent,  dur- 
ing the  summer  to  six  per  cent,  on  October  i8th,  and  finally 
to  seven  per  cent,  on  November  8th.  The  volume  of  trade 
did  not  seem  to  yield  to  the  pressure  of  high  rates  of  inter- 
est, and  prices  continued  to  climb  upward,  1  but  the  bullion 
in  the  bank  was  kept  nearly  stationary  through  the  year 
1856.  The  tightness  of  the  money  market  continued  into 
the  summer  of  1857,  when  on  August  i7th  the  bullion  stood 
at  ,£10,606,000  and  the  rate  of  discount  was  five  and  a  half 
per  cent. 

The  situation  in  the  United  States  was  complicated,  as  it 
was  in  France,  by  the  changes  in  the  metallic  circulation 
caused  by  the  great  production  of  gold.  Gold  took  the  place 
of  silver  as  the  overvalued  metal  at  the  coinage  ratio,  was 
invariably  chosen  by  debtors  for  payments,  and  silver,  hav- 
ing become  the  dearer  metal,  disappeared  from  circulation, 
in  spite  of  bimetallic  enactments,  under  the  relentless  opera- 
tion of  Gresham's  law.  The  Secretary  of  the  Treasury 
attempted  in  1853  to  relieve  the  contraction  thus  caused  by 
paying  for  silver  at  the  mint  in  gold,  which  would  be  added 
to  the  circulation.2  The  banks,  in  spite  of  their  rapid  in- 
crease, were  unable  to  keep  pace  with  the  demand  for  loan- 
able capital  which  resulted  from  the  fever  of  speculation.3 


1  Juglar,  363. 

2  Kinley,  175. 


3  The  number  of  banks  increased  from  715  in  1847  to  1416  in  1857, 
and  the  loans  and  discounts  from  1310,282,945  to  $684,456,887.  The 
increase  in  the  note  circulation  was  from  1105,519,766  to  $214, 778,822. 
The  circulation  fell  in  1858  to  $155,208,344  and  the  specie  holdings  of 


496          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

The  specie  reserves  of  the  New  York  banks  were  strength- 
ened for  a  time  by  government  bond  purchases  and  they 
were  able  to  expand  their  loans.  Foreign  capital  continued 
to  flow  into  the  United  States  and  the  bubble  of  speculation 
to  be  blown  to  the  extremist  tension. 

Conditions  were  ripe  both  in  Europe  and  America  for  a 
crash,  when  the  impulse  came  on  August  24,  1857,  fr°m  the 
failure  of  the  Ohio  Life  Insurance  and  Trust  Co.,  of  Cincin- 
nati and  New  York,  with  reported  liabilities  of  $7,000,000. 
A  panic  followed  on  the  New  York  Stock  Exchange,  stocks 
fell,  money  was  hoarded  and  loaned  only  at  extravagant 
rates,  deposits  began  to  disappear  from  the  banks,  and  late 
in  September  a  run  began  on  the  banks  of  Philadelphia. 
They  were  compelled  to  suspend  specie  payments  on  Sep- 
tember 26th  and  were  followed  by  the  New  York  City  banks 
on  October  i3th.  The  early  part  of  October  had  witnessed 
the  failure  of  the  Illinois  Central  Railroad,  the  New  York 
and  Erie,  and  the  Michigan  Central,  and  the  run  upon  the 
New  York  banks  for  the  withdrawal  of  their  deposits  fol- 
lowed close  upon  these  events. 1  Prices  of  commodities  tum- 
bled with  the  price  of  stocks  and  the  farmers  felt  the  pinch 
in  the  depreciation  of  wheat,  flour  and  pork  as  well  as  in 
the  fall  in  real  estate. 

Money  continued  tight  in  England  up  to  the  autumn  of 
1857  and  many  complaints  were  made  against  the  Bank  of 
England  for  the  high  rate  of  discount.  The  news  of  the 
failure  of  the  Ohio  Life  and  Trust  Co.  caused  intense  alarm 


the  banks,  which  had  not  suffered  during  the  crisis,  rose  from  $58,- 
349,838  in  1857  to  174,412,832  in  1858  and  to  $104,537,818  in  1859.  M. 
Juglar  points  out  that  it  was  not  increase  of  circulation  which  caused 
expansion  so  much  as  "the  attraction  of  deposits  by  high  interest 
and  the  lending  of  them  to  reckless  speculators."—^^  Crises  Com- 
merciales,  268. 

!The  New  York  banks  contracted  their  discounts  from  $122,000,000 
on  August  8th  to  $97,200,000  on  October  i7th.  The  constitution  of 
the  State  of  New  York  forbade  suspension  of  specie  payments  directly 
or  indirectly,  but  the  judges  of  the  Supreme  Court  met  and  agreed 
not  to  grant  any  injunction  unless  the  bank  appeared  to  be  insolvent 
or  guilty  of  fraud. — Sumner,  History  of  American  Currency,  184. 


THE  LATER   CRISES  OF   THE   CENTURY.  497 

for  the  ,£80,000,000  of  English  money  which  was  believed 
to  be  invested  in  American  securities.  A  group  of  specula- 
tors added  to  the  alarm  in  London  by  forming  a  combination 
to  "bear"  the  market,  by  finding  flaws  in  securities  and 
working  through  the  press  to  excite  general  distrust  and 
depress  prices.1  The  high  rates  of  interest  in  New  York  be- 
gan to  attract  gold  from  Hamburg  ;  the  Bank  of  France  lost 
25,000,000  francs  in  a  single  week,  and  the  bullion  in  the 
Bank  of  England  declined  to  ;£8, 991,000  on  October  igth. 
The  great  house  of  Dennistoun  stopped  payment  on  Novem- 
ber 7th,  with  liabilities  of  nearly  ,£2, 000,000,  the  Western 
Bank  of  Scotland  closed  its  doors  two  days  later  under  ap- 
palling revelations  of  mismanagement  and  loss,  the  City  of 
Glasgow  Bank  suspended,  and  the  banking  reserve  of  the 
Bank  of  England  dropped  on  November  nth  to  ,£1,462,000. 
The  money  actually  in  London  in  the  banking  department 
of  the  Bank  of  England  on  this  eventful  Wednesday  night 
consisted  of  ,£375,005  in  notes,  ^310,784  in  gold  coin,  and 
,£44,046  in  silver  coin.  The  bank  could  not  have  held  out 
a  day  longer  under  the  Act  of  1844.  It  would  have  been 
obliged  to  suspend  discounts  not  later  than  Friday  and  this 
would  have  been  followed  by  a  run  for  their  reserves  on  the 
part  of  the  stock  banks,  the  bill  brokers,  and  the  private 
bankers,  who  had  deposits  at  the  Bank  of  England  to  the 
amount  of  ,£5,458,000.  At  the  last  moment  the  Bank  Act 
was  suspended.  A  letter  reached  the  bank  on  November 
1 2th,  authorizing  them  to  issue  notes  in  excess  of  the  legal 
limit,  provided  they  maintained  the  rate  of  discount  at  ten 
per  cent.  Public  excitement  was  suddenly  calmed,  but  the 
demand  for  discounts  continued  heavy  for  more  than  a  fort- 
night. The  bank  issued  ,£2,000,000  in  notes  above  the  stat- 
utory limit,  but  the  maximum  in  the  hands  of  the  public  was 
,£928,000  on  November  2oth.  The  remainder  were  added 
to  the  banking  reserve.  The  governor  of  the  bank  after- 
wards testified  that  there  was  less  acute  panic  in  1857  than 
in  1847,  Dut  that  the  real  commercial  pressure  was  more 


London  Times,  Sept.  10,  1857,  quoted  by  Gilbart,  II.,  337. 

32 


498          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

intense.  This  may  be  judged  from  the  fact  that  the  aggre- 
gate loans  by  discounts  and  advances  on  stocks  by  the  Bank 
of  England  were  ,£12,645,000  from  November  i2th  to 
December  ist.1  Greater  caution  was  shown  than  on  former 
occasions  in  reducing  the  discount  rate,  and  it  was  main- 
tained as  high  as  five  per  cent,  in  1858  until  the  bullion  had 
returned  to  ^i5,ooo,ooo.2 

France  and  other  countries  of  the  Continent  suffered  in 
the  crisis  of  1857,  though  less  acutely  than  England  and 
America,  because  of  the  smaller  scope  of  their  commercial 
affairs.  The  establishment  of  the  Second  Empire  in  France 
gave  an  assurance  of  security  to  the  mercantile  classes, 
which  was  shaken  for  only  a  moment  at  the  outbreak  of  the 
Crimean  War.  Business  resumed  its  activity  when  it  ap- 
peared that  the  operations  of  the  war  would  be  confined  sub- 
stantially to  the  East  and  the  discounts  of  the  Bank  of  France 
rose  from  the  maximum  of  154,000,000  francs  ($29,000,000) 
in  1851  to  628,000,000  francs  ($121,000,000)  in  1857.  The 
bank  found  it  necessary  to  raise  the  discount  rate  to  six  per 
cent,  in  the  autumn  of  1856  and  found  its  specie  reserve  at 
Paris  reduced  in  January,  1857,  to  72,000,000  francs  ($14,- 
000,000).  One  of  the  surprising  features  of  the  panic  of 
1857  was  tne  disappearance  of  gold  from  circulation  in  spite 
of  the  enormous  production  of  the  preceding  ten  years.  The 
Bank  of  France  was  continually  in  the  market  as  a  purchaser 
of  bullion  and  expended  14,000,000  francs  in  1855,  1856, 
and  1857  in  premiums  on  1,274,508,519  francs  ($250,000,000) 
in  gold  bullion.3 


1  Levi,  404. 

2  MacLeod,  Theory  and  Practice  of  Banking,  II.,  190. 

3Juglar,  422.  This  disappearance  of  gold  from  sight,  when  the 
quantity  in  the  world  available  for  monetary  uses  had  probably  in- 
creased more  than  fifty  per  cent,  in  ten  years,  throws  an  interesting 
light  on  the  suggestion  of  Mr.  Forssell,  the  Swedish  delegate  to  the  in- 
ternational mon  etary  conference  of  1892,  that  an  attempt  to  create  a  mon- 
etary union  wide  enough  to  prevent  exports  of  the  metal  under- valued 
in  the  coinage  laws  would  be  followed  by  its  disappearance  within  the 
union.— Conference  Monetaire  Internationale,  Proces  Verbaux,  246. 


THE  LATER   CRISES  OF   THE   CENTURY.  499 

Hamburg,  with  her  purely  metallic  currency,  did  not  es- 
cape the  violence  of  the  storm.  The  rate  of  discount  reached 
nine  per  cent,  and  145  failures  occurred,  with  reported  liabili- 
ties of  $100, ooo, ooo. '  An  attempt  was  made  to  sustain  credit 
by  combination  among  the  leading  merchants,  but  it  failed 
and  resort  was  had  to  the  government,  which  borrowed  10,- 
000,000  marks  from  Austria  for  discounting  commercial  bills. 
The  Norwegian  and  Danish  governments  were  also  obliged 
to  contract  loans  for  the  benefit  of  the  mercantile  community, 
and  in  Sweden  the  National  Bank  was  authorized  to  borrow 
abroad  12,000,000  rix  dollars,  to  be  apportioned  among  the 
different  towns.2  In  Prussia  the  Jewish  houses  suffered 
more  than  the  banks,  and  complaint  was  made  that  the 
substantial  monopoly  of  the  Bank  of  Prussia  injured  credit 
by  the  contraction  of  the  volume  of  circulation.  The  laws 
against  usury  were  suspended  and  the  banks  were  author- 
ized to  discount  paper  secured  by  either  raw  materials  or 
manufactured  goods. 

The  Crisis  of  186^-66. 

The  years  following  the  outbreak  of  the  American  civil 
war  were  years  of  financial  disturbance  in  both  Kurope  and 
America,  partly  as  the  result  of  influences  set  in  operation 
by  the  war,  and  partly  as  the  result  of  independent  influ- 
ences whose  effect  was  intensified  by  the  operation  of  the 
others.  Periods  which  witness  the  turning  of  business  from 
its  ordinary  courses  into  new  channels  are  always  periods  of 
uneasiness,  of  unusual  risks  and  of  speculative  tendencies. 
This  was  the  character  of  the  entire  period  from  1861  to 
1866.  The  great  discoveries  of  gold  which  had  lent  their 
brilliant  hue  to  the  dreams  of  American  business  men  be- 
fore the  crisis  of  1857  began  to  have  a  more  marked  effect  in 
Europe  a  few  years  later.  Their  effect  was  heightened  by 
the  fact  that  at  the  close  of  1861  the  banks  and  Treasury  of 
the  United  States  suspended  specie  payments  and  gold  flowed 


1  Courtois,  235. 

2  Levi,  405. 


500          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

with  an  accelerated  current  towards  Europe.  The  net  gold 
exports  from  the  United  States  in  1862  were  $21,532,892  ;  in 
1863,  $56,632,300;  in  1864,  $89,484,865;  and  in  1865,  $51,- 
882,805.  These  great  additions  to  the  monetary  supply  of 
Europe  produced  only  a  slight  effect  upon  prices, '  but  they 
proved  a  great  stimulus  to  business  activity,  because  of  the 
means  of  conducting  exchanges  which  they  put  in  circula- 
tion in  countries  formerly  without  such  means.  The  effect 
in  France  is  described  by  an  eminent  French  writer,2  in  the 
following  terms : 

In  those  arrondissements  and  cantons  where  formerly  the  bill  was 
a  myth  and  the  gold  louis  a  phenomenon,  hundreds  of  thousands  of 
francs  and  even  millions  in  specie  and  in  bills  are  now  in  continuous 
rotation,  promoting  a  movement  of  transactions  which  grow  in  in- 
tensity and  extent  day  by  day.  They  constitute  a  potent  dike  against 
depression  and  depreciation.  The  ancient  possessor  of  monetary 
capital  is  neither  robbed  nor  defrauded  by  this  increase  in  the  quan- 
tity of  instruments  of  circulation,  whether  the  increase  consists  in 
real  gold  or  in  credit  gold  (or suppose}.  On  the  contrary,  he  gains  as 
much  by  it,  more  perhaps,  than  the  general  public.  The  superior 
activity  of  exchanges  assures  to  the  aggregate  of  circulating  capital 
employment  more  fertile,  more  constant,  and,  inasmuch  as  it  stimu- 
lates production  and  renders  products  more  abundant  and  less  dear, 
it  even  increases  the  value  and  the  purchasing  power  of  the  pre- 
existing gold. 

The  news  of  war  in  America  had  an  immediate  effect  upon 
the  price  of  cotton  and  upon  the  London  money  market. 
The  first  influence  upon  the  Bank  of  England,  before  the 
suspension  of  specie  payments  in  the  United  States,  was  a 
loss  of  bullion  and  an  increase  of  the  discount  rate  on  Feb- 
ruary 14,  1 86 1,  to  eight  percent.  The  United  States  became 
smaller  purchasers  than  before  from  Europe  and  if  they  had 
remained  on  a  specie  basis  might  have  exacted  the  price  of 

1  Prof.  Jevons,  who  accepts  the  quantitative  theory  of  money  suffi- 
ciently to  make  a  careful  mathematical  calculation  of  the  effects  of 
the  new  gold,  declares  "that  ten  per  cent,  may  be  taken  as  the  best 
approximation  which  we  can  get  to  the  rise  of  prices  between  1845- 
50  and  1860-62." — Investigations  in  Currency  and  Finance ',  58. 

2  Horn,  263. 


THE  LATER   CRISES  OF   THE   CENTURY.  501 

their  exports  for  a  time  in  specie.  The  opposite  policy  caused 
bullion  to  flow  freely  into  the  Bank  of  England  and  per- 
mitted the  gradual  reduction  of  the  discount  rate  to  two  and 
a  half  per  cent,  in  January,  1862.  The  high  price  of  cotton 
still  required  specie  exports,  but  not  to  the  United  States. 
The  blockade  of  the  Southern  ports  compelled  English  mills 
to  seek  their  raw  materials  in  other  markets.  India,  Egypt, 
and  China  were  appealed  to,  and  it  was  not  possible  to  com- 
pensate this  new  trade  at  once  by  exports  of  merchandise. 
It  had  to  be  settled,  especially  in  the  case  of  India,  by  ex- 
ports of  silver  from  Great  Britain.1  France  felt  the  counter- 
stroke  of  this  movement  in  the  steady  export  of  silver  in 
exchange  for  gold.  Silver  was  more  valuable  as  bullion  than 
at  the  ratio  fixed  by  the  French  coinage  laws  and  was  sold 
at  a  premium  for  gold  imported  from  England  and  the 
United  States.  The  Bank  of  France  was  driven  to  making 
its  redemptions  in  gold,  in  order  to  prevent  a  run  for  silver. 
The  bank  not  only  exchanged  50,000,000  francs  in  silver  for 
an  equal  sum  in  gold,  at  the  coinage  ratio,  with  the  Bank  of 
England,  but  in  November,  1860,  effected  a  like  exchange 
of  30,000,000  francs  with  Russia  and  in  July,  1861,  of  6,000,- 
ooo  francs  with  the  Bank  of  Italy.3 

The  reduction  of  the  cotton  supply,  the  derangement 
caused  by  the  new  supplies  of  gold,  and  the  accumulation  of 
capital  in  Great  Britain  as  the  result  of  the  extended  use  of 
machinery,  gave  a  feverishness  and  speculative  character  to 
the  money  market  which  recalled  the  manias  of  1825  and 
1847  in  Great  Britain  and  of  1837  an<^  T^57  *n  tne  United 
States.  One  of  the  new  elements  which  entered  into  the 
problem  in  Great  Britain  was  the  creation  of  companies  of 


1  The  net  imports  of  silver  into  India  for  the  four  years  ending 
March  31,  1866,  were  54,094,337  tens  of  rupees,  or  13,523,584  tens  of 
rupees  per  year,  while  the  bills  on  India  sold  by  the  home  govern- 
ment were  29,409,469  tens  of  rupees,  or  7,352,368  tens  of  rupees  per 
year.  The  annual  average  for  the  five  years  ending  with  1860  was 
10,072,495  tens  of  rupees  in  silver  and  992,569  in  bills.  The  ten  of 
rupees  was  about  equal  to  £1. 

*  Juglar,  426. 


502          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

limited  liability.  Such  companies  were  only  created  by 
special  charter  prior  to  1855,  an(^  it  was  n°t  until  after  the 
amendment  of  the  Companies'  Act  in  1862  that  their  crea- 
tion attained  the  proportions  of  a  mania.  A  new  form  of 
financial  enterprise  which  developed  was  the  creation  of  stock 
companies  to  furnish  funds  for  new  enterprises  upon  pledge 
of  their  stock.  A  proposed  railway  would  not  await  the 
slow  process  of  placing  its  stock  and  bonds  among  investors, 
in  order  to  obtain  funds  to  begin  construction,  but  would 
deposit  these  securities  with  a  finance  company,  which  would 
agree  to  accept  its  debts  for  a  specified  sum.  The  immediate 
service  rendered  by  the  finance  company  was  simply  the  use 
of  its  name,  and  the  dangers  of  this  method  of  financing  did 
not  become  obvious  until  these  long-dated  acceptances  began 
to  press  upon  the  market.  The  finance  companies  were  able 
to  sell  their  own  shares  at  high  prices  and  thus  obtained  the 
funds  with  which  to  make  advances  to  the  railways  and 
construction  companies.1 

This  new  method  of  financing,  through  great  capitalists 
and  banking  companies,  was  legitimate  within  the  limits  of 
the  strength  of  the  guaranteeing  companies,  and  the  pros- 
pects of  the  new  enterprises,  and  it  afforded  a  method  of  set- 
ting in  operation  at  once  enterprises  for  which  the  capital 
could  not  formerly  have  been  found  without  appealing  to  the 
clumsy  methods  of  government  finance.  The  new  system 
was  employed,  however,  without  wisdom  and  sometimes 
without  honesty  during  the  sixties  and  it  soon  brought  the 
inevitable  crash.  One  of  the  most  conspicuous  of  the  new 
finance  houses  was  that  of  Overend,  Gurney,  and  Co.,  which 
made  investments  in  railways  in  Great  Britain,  in  cotton  in 
the  United  States,  and  in  new  enterprises  in  India.  The 
company  commanded  the  unlimited  confidence  of  the  public, 
because  of  the  high  credit  of  the  private  firm  which  was 
turned  into  a  limited  company  in  July,  1865.  The  firm  was 
already  in  debt  at  that  time  to  the  amount  of  ,£2,970, 168  and 
the  methods  by  which  this  money  had  been  lost  were  reck- 


1  Levi,  462. 


THE  LATER  CRISES  OF  THE   CENTURY.  503 

lessly  continued  by  the  limited  company.  The  very  confi- 
dence reposed  in  the  company  was  to  some  extent  the  cause 
of  its  later  fall,  for  it  invited  such  large  deposits  that  use  had 
to  be  found  for  them  at  the  expense  of  safety. 

The  craze  for  limited  companies  increased  their  number  in 
England  within  a  few  years  by  nearly  three  hundred,  with  a 
nominal  capital  of  ^504,000,000.  Many  were  abandoned 
before  starting,  others  went  into  bankruptcy,  and  the  project- 
ors of  some  disappeared,  leaving  no  record  behind  them. 
The  deposits  in  the  London  joint  stock  banks  increased  from 
^43,  000,000  in  1860  to  ^91,000,000  in  1864,  and  the  country 
and  private  banks  probably  held  on  the  latter  date  ,£20,000,- 
ooo  more.  A  large  part  of  these  deposits  consisted  of  ac- 
ceptances, which  were  confounded  indiscriminately  with  cash 
and  credits.1  France  had  entered  upon  the  policy  of  "fi- 
nancing," under  the  encouragement  of  Napoleon  III.,  even 
in  advance  of  England,  and  her  great  Societe  de  Credit  Mobi- 
lier  for  several  years  paid  tempting  profits  and  was  the  model 
of  similar  creations  across  the  channel.2  But  France  and  the 
Continent  met  their  crisis  in  1864.  The  rise  of  prices  was 
arrested  in  January  of  that  year  and  the  Bank  of  France,  by 
keeping  its  discount  rate  two  per  cent,  below  that  in  Lon- 
don, was  obliged  to  purchase  gold,  from  January  to  Novem- 
ber, to  the  amount  of  221,000,000  francs.  Discounts  fell  off 
and  business  for  the  next  six  years  was  kept  within  conser- 
vative limits  by  the  fear  of  war  and  the  political  uncertainties 
attending  the  decadence  of  the  Second  Empire.  8 

Deficient  crops  added  their  influence  in  1862  to  high  prices 
for  cotton  to  create  a  balance  of  trade  adverse  to  England, 
but  it  was  not  until  the  close  of  1863  that  the  exchanges  be- 
came adverse,  the  metallic  reserve  of  the  Bank  of  England 
fell  to  ^13,000,000,  and  the  discount  rate  was  gradually 
raised,  until  in  December  it  stood  at  eight  per  cent.  Bullion 
began  to  flow  back  into  the  bank,  the  rate  was  reduced, 


1  Juglar,  385. 

2  Levi,  461. 

3  Courtois,  255. 


J 


504          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

speculation  revived,  and  a  new  increase  to  nine  per  cent,  be- 
came necessary  late  in  April,  1864.  There  was  another  lull 
until  the  autumn,  when  the  prospect  of  peace  in  the  United 
States  caused  a  tumble  in  cotton  and  a  smaller  fall  in  prices 
of  all  commodities.  The  bank  rate  was  again  advanced  to 
nine  per  cent,  in  September,  there  was  an  increase  of  £2,- 
500,000  in  discounts,  and  the  pressure  for  ready  money  was 
so  intense  that  Consols  fell  from  89  to  87.  The  year  1864 
witnessed  in  a  sense  two  crises  in  England, — the  first  result- 
ing in  the  liquidation  of  the  smaller  tradesmen,  the  second 
involving  the  great  capitalists.  The  liquidation  of  both  these 
classes  was  completed  on  the  Continent  in  1864.  The  effects 
of  the  crisis  crossed  the  oceans  to  Brazil  and  Australia  and 
if  they  were  not  felt  in  the  United  States  it  was  because  the 
events  of  the  war  interrupted  the  regular  movements  of  the 
economic  system.  Liquidation  was  not  fully  completed  in 
England  in  the  case  of  the  great  financiers  and  the  spring  of 
1866  witnessed  an  after-clap  more  severe  in  its  effects  than 
the  crisis  of  1864. 

The  first  gust  of  the  storm  of  1866  was  the  failure  of  the 
Joint-Stock  Discount  Company  in  February,  which  was  fol- 
lowed in  March  by  the  suspension  of  Barned's  Bank  of 
Liverpool,  with  liabilities  of  ^3, 500,000.'  The  discount 
rate  of  the  Bank  of  England,  which  had  fallen  to  six  per 
cent.,  was  raised  to  seven  per  cent,  on  May  3d,  eight  per 
cent,  on  May  8th,  nine  per  cent,  on  May  gth,  and  ten  per 
cent,  on  May  loth.  It  was  on  the  evening  of  the  last  named 
day,  after  banking  hours,  that  the  news  spread  of  the  great- 
est failure  which  had  ever  taken  place  in  England.  An 
action  was  pending  in  the  courts  against  the  Mid- Wales 
Railway  Company,  to  recover  ,£60,000,  accepted  by  them 
and  held  by  the  great  house  of  Overend,  Gurney,  and  Co., 
and  two  other  firms.  Judgment  was  delivered  on  May  Qth, 
to  the  effect  that  the  railway  company  had  no  right  to  accept 
the  bills  and  that  they  were  of  no  validity.2  The  decision  of 


1  Gilbart,  II.,  343. 

3  MacLeod,  Theory  of  Credit,  II.,  832. 


THE  LATER   CRISES  OF   THE   CENTURY.  50$ 

the  court,  coming  at  a  season  of  growing  alarm,  caused  a  run 
upon  Overend,  Gurney,  and  Co.,  by  depositors,  and  on  the 
afternoon  of  May  loth  the  firm  suspended  with  liabilities  of 
^18,727,915. ' 

The  next  day,  May  nth,  known  as  "  Black  Friday,"  was 
long  memorable  in  English  financial  history.  Lombard 
Street  became  impassable  with  the  surging  crowd  and  ex- 
travagant rumors  assailed  the  reputations  of  the  strongest 
houses.  The  Bank  of  England  extended  accommodations 
during  the  day  in  loans  and  discounts  to  an  amount  exceed- 
ing ,£4,000,000,  and  the  banking  reserve  was  reduced  close 
to  ,£3,000,000.  The  Chancellor  of  the  Exchequer  announced 
these  facts  in  the  evening  in  the  House  of  Commons  and 
stated  that  the  government  had  addressed  a  letter  to  the 
bank,  authorizing  the  suspension  of  the  Act  of  1844.  The 
announcement  was  received  with  cheers  and  the  news  had  a 
marked  effect  in  mitigating  the  panic  the  next  day.  The 
decision  to  authorize  the  extra  issue  was  not  reached  until 
midnight,  and  a  deputation  from  the  bankers  waited  upon 
the  Chancellor  while  the  House  was  in  session.  One  of  the 
representatives  of  the  joint  stock  banks  is  reported  to  have 
said  to  the  representative  of  the  Bank  of  England,  "  I  can 
draw  a  couple  of  checks  to-morrow  morning  which  will  shut 
you  up  at  once. ' ' a  The  letter  of  the  government,  signed  by 


1  These  figures  are  taken  from  the  report  of  the  liquidators  at  a 
meeting  for  dissolving  the  company,  held  in  London  on  November 
16,  1893.  It  appeared  that  ,£"8,266,048  of  the  liabilities  was  on  account 
of  bills  re-discounted  under  the  guarantee  of  the  company  and  ,£"6,018,- 
835  was  due  creditors  holding  security.  The  proved  claims  were 
finally  reduced  to  ^4,913,382,  including  interest,  and  they  were  paid 
out  of  the  proceeds  of  amounts  realized  from  bills  of  exchange  and 
other  credits  to  the  amount  of  ,£"1,982,289  ;  from  assets  of  the  old  firm, 
,£"688,561  ;  separate  estates  of  the  partners  of  the  old  firm,  ^£"909,870  ; 
cash  and  interest  on  investments,  ,£"60,273  '•>  a°d  calls  of  ,£"25  per 
share  upon  the  shareholders,  ,£"2,088,286.  The  liquidators  were  en- 
abled to  return  ,£"626,945  to  the  contributories,  and  the  various  law 
costs  and  expenses  of  the  twenty-seven  years  of  liquidation  were 
^188,953.—  London  Bankers'  Magazine,  Dec.,  1893,  LVL,  809. 

9Gilbart,  II.,  354. 


506          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

Lord  John  Russell  and  Mr.  Gladstone,  contained  the  following : 

If,  then,  the  directors  of  the  Bank  of  England,  proceeding  upon 
the  prudent  rules  of  action  by  which  their  administration  is  usually 
governed,  shall  find  that,  in  order  to  meet  the  wants  of  legitimate 
commerce,  it  be  requisite  to  extend  their  discounts  and  advances  upon 
approved  securities,  so  as  to  require  issues  of  notes  beyond  the  limits 
fixed  by  law,  Her  Majesty's  Government  recommend  that  this  neces- 
sity should  be  met  immediately  upon  its  occurrence,  and  in  that 
event  they  will  not  fail  to  make  application  to  Parliament  for  its 
sanction. 

No  such  discount  or  advance,  however,  should  be  granted  at  a  rate 
of  interest  less  than  ten  per  cent.,  and  Her  Majesty's  Government 
reserve  it  to  themselves  to  recommend,  if  they  should  see  fit,  the  im- 
position of  a  higher  rate.  After  deduction  by  the  bank  of  whatever 
it  may  consider  to  be  a  fair  charge  for  its  risk,  expense  and  trouble, 
the  profits  of  these  advances  will  accrue  to  the  public. 

The  effect  of  the  suspension  of  the  Act  of  1844  was  so 
marked  that  it  appeared  the  next  day,  which  was  Saturday, 
as  if  the  crisis  was  at  an  end.  The  pressure  upon  the  banks 
ceased  for  the  moment,  and  the  Bank  of  England  did  not 
find  it  necessary  to  use  the  authority  to  issue  notes  beyond 
the  legal  limits.  The  demands  for  discount  continued  large, 
but  were  met  from  the  deposits,  which  were  poured  freely 
into  the  bank  by  the  outside  bankers  when  they  were  assured 
that  their  appeals  for  notes  would  be  honored.  Large  com- 
mercial failures  began  again,  however,  during  the  week, 
which  imperilled  the  banks  holding  their  paper  and  led  to 
new  demands  by  depositors.  The  Bank  of  London  paid  out 
fifty  per  cent,  of  its  deposits  in  cash  and  was  obliged  to  stop, 
with  liabilities,  according  to  its  last  balance  sheet,  of  ,£4,335, - 
877.  The  Consolidated  Bank  came  to  its  rescue,  but  was  in 
its  turn  exhausted.  The  Agra  an'd  Masterman's  Bank,  with 
wide  connections  in  India  and  the  East,  and  obligations  of 
^15,582,002,  was  also  compelled  to  suspend  payments.  These 
banks  had  ample  assets,  but  were  unable  to  convert  them 
into  bank-notes  and  cash  rapidly  enough  to  meet  the  de- 
mand of  their  depositors.  The  magnitude  of  the  demands 
upon  the  Bank  of  England  after  the  authority  was  given  to 
suspend  the  Bank  Act,  may  be  judged  from  the  debate 


THE  LATER   CRISES  OF   THE   CENTURY.  507 

which  took  place  in  the  House  of  Commons  on  the  evening 
of  May  lyth.  The  Chancellor  of  the  Exchequer  stated,  in 
reply  to  a  number  of  interrogations  : 

The  advances  made  by  the  Bank  of  Bngland  on  government 
securities  on  Friday,  the  day  of  the  panic,  amounted  to  ,£"919,000,  on 
Saturday  to  ,£"747,000,  and  on  three  subsequent  days  various  amounts, 
making  up  the  total  amount  advanced  on  these  securities  in  five  days 
to  ^2,874,000.  Then  with  regard  to  the  accommodation  of  commerce 
in  general,  the  best  measure  that  can  be  given  of  the  manner  in 
which  the  bank  has  exercised  its  functions  is  shown  in  this  : — that  it 
has  made  advances  upon  bills  and  has  discounted  bills  to  the  extent 
of  ^9,350,000,  making  a  total  of  advances  and  discounts  in  five  days 
of  ^12,225, ooo.1 

The  rate  of  ten  per  cent,  at  the  Bank  of  England  was  main- 
tained from  May  nth,  to  August  6th,  and  distrust  of  Eng- 
lish investments  was  so  keen  that  this  high  rate  failed  for  a 
time  to  attract  foreign  capital  from  countries  where  interest 
rates  ruled  much  lower.  The  rate  of  the  Bank  of  France 
continued  for  months  at  four  per  cent,  and  the  coin  reserves 
of  the  bank  remained  unimpaired.2  This  circumstance  was 
seized  upon  by  critics  of  the  rule  of  controlling  the  flow  of 
bullion  by  the  discount  rate  as  proof  that  the  rule  was  not 
based  upon  sound  economic  law.  The  simple  truth  was  that 
the  credit  of  English  finance  was  shaken  to  its  centre.  A 
high  rate  of  interest  ceases  to  attract  when  grave  doubt  ex- 
ists whether  the  principal  will  ever  be  repaid.  England  paid 
the  penalty  for  the  wide  ramification  of  her  credit  system, 
and  the  severe  shock  which  it  received  in  1866,  in  an  almost 
universal  fear  that  her  great  banks  and  finance  companies, 
even  the  Bank  of  England  itself,  were  on  the  verge  of 
bankruptcy.  The  prevalence  of  a  ten  per  cent,  rate  for 

'Gilbart,  II.,  348. 

2  Liquidation  in  France  had  already  taken  place,  in  anticipation  of 
war,  and  the  suspension  of  specie  payments  in  Italy  sent  large  quanti- 
ties of  bullion  over  the  Alps.— MacLeod,  Theory  and  Practice  of  Bank- 
ing ^  II.,  196-97.  M.  Horn  endeavors  to  trace  the  low  rates  in  France  to 
the  agitation  there  against  the  monopoly  of  the  Bank  of  France,  but 
if  such  an  influence  operated,  it  was  evidently  only  because  other  con- 
ditions concurred  to  make  low  rates  safe. — La  Libert^  des  Banques,  446. 


508          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

three  months  was  in  itself  a  heavy  fetter  upon  trade  and. 
strengthened  the  belief  that  there  was  something  funda- 
mentally wrong  with  English  banking.  The  distrust  abroad 
was  profound  enough  to  justify  for  a  moment  the  phrase  of 
Sir  Stafford  Northcote,  that  there  was  "a  run  upon  Eng- 
land," and  to  wound  the  national  pride  with  the  unaccus- 
tomed fear  that  lyOndon  was  about  to  lose  her  pre-eminence 
over  the  money  markets  of  the  world  . ' 

In  the  presence  of  such  fears,  an  economic  law  which 
would  operate  under  normal  conditions  of  credit  was  tem- 
porarily suspended,  just  as  in  the  past  few  years  foreign 
capital  has  been  persistently  withdrawn  from  the  United 
States,  in  spite  of  tempting  opportunities  for  investment, 
because  of  the  fear  that  they  would  abandon  the  gold  stan- 
dard. The  cherished  "  convertibility  of  the  bank-note" 
did  not  prevent  the  suspicion  abroad  that  the  British  govern- 
ment intended  to  establish  forced  legal  tender,  and  its 
intervention  to  permit  the  suspension  of  the  Bank  Act  of 
1844  was  interpreted  among  those  not  familiar  with  the 
English  banking  system  as  a  step  in  that  direction.  The 
Earl  of  Clarendon  gave  official  testimony  to  the  gravity  of 
the  situation,  without  accomplishing  much  to  relieve  it,  by 
issuing  a  circular  letter  to  the  British  embassies  throughout 
Europe,  stating  that  "Her  Majesty's  government  have  no 
reason  to  apprehend  that  there  is  any  general  want  of  sound- 
ness in  the  ordinary  trade  of  this  country  which  can  give 
reasonable  ground  for  anxiety  or  alarm,  either  in  this  coun- 
try or  abroad."8  Distrust  at  home  had  not  at  any  time 
extended  to  the  solvency  of  the  Bank  of  England,  after  the 
directors  were  authorized  to  borrow  from  the  reserve  in  the 
issue  department,  and  the  bullion,  never  below  ^11,800,000, 
rose  in  December  to  ^19,200,000.  The  discounts,  which  had 
risen  during  the  acute  stage  of  the  panic  to  ,£33,400,000, 
fell  gradually,  with  liquidations  and  the  slackening  of  busi- 
ness, to  ^19,100,000. 


1  Wolowski,  La  Banque  d'Angleterre,  etc.,  133. 

2  Levi,  471. 


THE  LATER   CRISES  OF   THE   CENTURY.  509 

The  Depression  of  1873-79. 

The  long  period  of  depression  which  began  with  panics  in 
Austria  and  the  United  States  in  1873,  and  which  had  hardly 
terminated  six  years  later,  followed  some  of  the  most  re- 
markable experiences  of  the  waste  of  national  resources, 
the  sinking  of  capital,  and  changes  in  the  economic  order 
which  the  world  has  ever  seen.  National  resources  were 
wasted  like  water  in  three  great  wars, — that  of  Secession  in 
the  United  States,  that  of  Italy  against  Austria  in  1866,  and 
that  of  France  against  Germany  in  1870.  The  direct  cost 
of  the  American  war,  exclusive  of  pensions,  was  estimated 
at  more  than  $5,500,000,000,  to  the  government  of  the 
United  States  alone,  exclusive  of  the  cost  to  the  South,  the 
injury  to  private  property,  and  the  drain  upon  the  productive 
power  of  the  country.1  The  cost  of  the  Franco-Prussian 
War,  brief  as  its  military  operations  proved  to  be,  was  esti- 
mated at  a  total,  direct  and  indirect,  of  $2,700,000,000,  of 
which  $2, 125,000,000  was  the  share  of  France  and  $575,000,- 
ooo  the  share  of  Germany.3  The  effect  of  an  important  war 
upon  credit  is  to  compel  a  forced  liquidation  of  business 
transactions  in  advance  of  the  time  which  would  be  set  by 
the  normal  movements  of  a  credit  cycle.  If  this  was  the 
case  during  the  Napoleonic  wars,  it  has  been  more  strikingly 
the  case  under  modern  conditions,  with  the  great  expansion 
of  credit  which  thejr  have  involved.  The  United  States, 
having  escaped  the  crisis  of  1866  by  the  forced  liquidations 
of  1860  and  1861,  was  ripe  for  an  explosion  in  1873  ;  while 
France,  having  been  forced  to  liquidation  in  1870,  felt  only 
the  ripples  of  the  crisis  of  1873,  which  were  wafted  back 
from  the  storm  in  other  countries. 

The  absorption  of  capital  in  great  enterprises  during  the 
ten  years  prior  to  1873  was  as  great  as  its  waste  in  war.  The 
average  annual  increase  of  railways  in  the  United  States  from 
1860  to  1867  was  I311  miles.  The  increase  in  1869  was 
4953  miles;  in  1870,  5690  miles;  in  1871,  7670  miles;  in 

1  Bolles,  III.,  244. 

2  Giffen,  I.,  76. 


510          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

1872,  6167  miles  ;  and  in  1873,  after  the  panic  had  broken, 
3948  miles.1  The  United  States  did  not  stand  alone  in  rail- 
way expansion.  In  Russia,  a  system  of  12,000  miles  of 
railway  had  been  almost  entirely  created  since  1868  ;  in 
Austria,  eight  years  had  witnessed  an  increase  from  2200  to 
6000  miles  ;  and  in  South  America,  nearly  $200,000,000  of 
English  capital  had  been  borrowed,  mostly  for  railway  enter- 
prises.9 The  result  of  this  network  of  new  lines  was  the 
opening  of  great  producing  areas,  which  laid  down  their 
harvests  in  Liverpool  and  Hamburg  at  prices  which  crushed 
competition,  forced  down  the  prices  of  English  and  German 
agricultural  lands,  and  threatened  the  earnings  of  the  laborer. 
The  great  war  indemnity  paid  by  France  to  Germany  ac- 
cumulated such  a  surplus  of  loanable  capital  in  the  latter 
country  that  new  manufacturing  industries  sprung  up  all 
over  the  Empire,  which  soon  outran  the  demands  of  domes- 
tic consumption,  and  the  agricultural  population  flocked 
rapidly  from  the  country  to  the  cities.  In  Prussia  alone 
687  new  joint  stock  companies  were  founded  between  Janu- 
ary i,  1872,  and  July  i,  1873,  with  an  aggregate  capital  of 
$481,045,000.  The  construction  of  the  Suez  Canal  was  com- 
pleted in  1869,  destroying  the  value  of  much  pre-existing 
shipping,  and  the  development  of  railway  building  gave 
extraordinary  activity  to  mining,  forced  up  the  prices  of 
iron  and  resulted  in  the  establishment  of  many  new  foundries 
in  Great  Britain  and  the  United  States.  To  these  causes  of 
the  loss  and  absorption  of  capital  had  to  be  added,  during 
the  period  of  liquidation,  the  effect  of  bad  crops  in  Great 
Britain  and  the  destruction  of  vineyards  in  France  by  the 
ravages  of  the  phylloxera,  to  the  value  of  $2, 000,000, ooo.3 
The  world  had  gained  greatly  in  productive  power  during 
the  two  decades  ending  in  1873,  but  the  gain  was  not  suffi- 
cient to  offset  the  combined  operation  of  all  these  causes  of 
waste  and  these  transformations  of  old  conditions.  The 
United  States,  revelling  in  the  fool's  paradise  of  forced  legal 
tender  paper  currency,  was  subjected  to  several  severe  heats 

1  Gilbart,  II.,  388. 

2  Giffen,  I.,  113-14. 

3  Wells,  23. 


THE  LATER   CRISES  OF   THE   CENTURY.  $11 

and  chills,  while  timid  statesmen  were  waiting  for  the  coun- 
try "to  grow  up"  to  the  volume  of  the  currency.  Great 
Britain  poured  out  her  capital  in  foreign  loans,  as  if  untaught 
by  the  history  of  previous  losses,  and  the  total  securities 
floated  were  calculated  at  ,£505,000,000  in  1872  and  ,£624,- 
000,000  in  1873.  The  number  of  joint  stock  companies 
formed  in  Great  Britain  in  1872  was  1116,  with  a  subscribed 
capital  of  ^130,000,000,  and  British  exports  rose  from  ^199,- 
586,000  in  1870  to  ^255,165,000  in  1873. l  Prices  were  in- 
flated on  every  European  bourse,  and  when  the  crash  came 
the  fall  in  securities  on  the  Berlin  market  alone  was  estimated 
at  I3i,i38,ooothalers.  Loans  taken  in  lyondon  to  the  amount 
of  ^"614,228,300  were  found  wholly  or  partially  in  default  in 
1873  to  the  amount  of  ^332,399,800  of  the  principal  involved.2 
Stringency  was  the  chronic  condition  of  the  money  market 
in  the  United  States  during  the  closing  portions  of  1872  and 
the  spring  and  summer  of  1873.  The  final  crash  came  with 
the  failure  of  trust  companies  in  New  York  and  Brooklyn 
early  in  September,  1873.  They  were  followed  on  September 
1 8th  by  the  failure  of  Jay  Cooke  and  Company,  who  were 
agents  of  the  government  and  had  been  leaders  of  the  pow- 
erful syndicate  which  had  handled  the  refunding  of  the 
public  debt.  Credit  was  already  greatly  overstrained,  runs 
took  place  on  the  banks  of  Washington,  Philadelphia,  and 
New  York,  nineteen  banks  and  trust  companies  closed  on 
September  i9th,  and  the  Stock  Exchange  was  closed  for  ten 
days.  Failures  followed  each  other  in  quick  succession, 
mills  and  foundries  stopped,  production  ceased,  and  for  six 
years  the  pall  of  depressed  industry  lay  over  the  United 

1  The  fact  that  loans  are  made  chiefly  in  commodities  rather  than 
in  currency  is  an  important  factor  in  finance  and  has  had  much  to  do 
with  the  development  of  English  trade.     The  exporter  furnishes  the 
commodities,   which  have  for  him  the  character  of  sales  for  cash, 
because  the  bills  which  he  draws  are  purchased  by  lenders  of  capital, 
for  transmission  to  the  borrowing  country  in  payment  for  the  new 
securities.     The  borrowing  country,  being  thus  permitted  to  purchase 
by  the  evidences  of  deferred  payments,  is  able  to  become  a  much 
larger  purchaser  than  would  otherwise  be  the  case. — London  Bankers' 
Magazine ;  May,  1892,  LIU.,  739. 

2  Levi,  498. 


512 


HISTORY  OF  MODERN  BANKS  OF  ISSUE. 


States.  Deposits  in  the  national  banks  fell  from  $641,121,- 
775  on  June  13,  1873,  to  $540,510,602  on  December  26th. 
The  failures  for  four  years  showed  aggregate  liabilities  of 
$775,865,000  and  the  railway  bonds  in  default  on  January 
i,  1876,  amounted  to  $789, 367, 655. 1 

The  Secretary  of  the  Treasury  endeavored  to  relieve  the 
money  market  by  paying  out  $24,000,000  in  the  purchase  of 
bonds.  L,ittle  of  the  money  reached  the  New  York  banks 
and  they  found  a  more  effectual  expedient  in  the  issue  of 
clearing-house  certificates.2  This  resource  had  been  availed 
of  during  the  forced  liquidations  of  1860  and  other  years  of 
the  war,  but  the  amount  had  never  before  reached  the  fig- 
ures which  were  attained  in  1873.  These  certificates  were 
issued  by  a  committee,  upon  the  deposit  of  approved  securi- 
ties by  the  banks  taking  out  certificates,  and  were  receivable 
in  the  settlement  of  the  balances  of  the  several  banks  at  the 
clearing  house.  This  made  them  the  equivalent  of  currency 
in  the  bank  reserves  and  released  a  corresponding  amount  of 
currency  for  other  uses.  The  issues  of  clearing-house  cer- 
tificates at  New  York  on  the  various  occasions  of  stringency 
since  they  were  first  adopted  have  been  as  follows  :  * 


YEAR. 

FIRST  ISSUE. 

FINAL  CANCELLATION.            TOTAL  ISSUE. 

MAXIMUM   OUT- 
STANDING. 

i860 

Nov.    23 

Mar.    9,  1861 

$  7,375,ooo 

$    6,86O,OOO 

1861 

Sept.    16 

Apr.  28,  i  §62 

22,585,000 

2I,96O,OOO 

1863 

Sept.    15 

Feb.    i,  1864 

11,471,000 

9,608,000 

1864 

Feb.     29 

June  13,  1864 

17,728,000 

16,418,000 

1873 

Sept.    22 

Jan.  14,  1874 

26,505,000 

22,4IO,OOO 

1884 

May     15 

June    6,  i8844 

24,915,000 

21,885,000 

1890 

Nov.    12 

Feb.    7,  1891 

16,645,000 

15,205,000 

1893 

June    21 

Nov.   i,  1893 

41,490,000 

38,280,000 

1  Wells,  6. 

2  Kinley,  185-86. 

3  New  York  Journal  of  Commerce,  Jan.  16,  1896.    The  Philadelphia 
clearing  house  issued  16,785,000  in  1873.    The  banks  paid  six  per  cent, 
interest  on  the  certificates  held,  which  ensured  their  retirement  when 
the  emergency  was  passed. 

4  Except  $250,000  issued  to  the  Metropolitan  National  Bank,  some 
of  which  were  not  paid  until  September  23,  1886. 


THE  LATER   CRISES  OF   THE   CENTURY.  513 

The  crash  in  Vienna  came  earlier  than  that  in  the  United 
States.  The  German  government  became  disquieted  by  the 
fever  of  speculation  in  Prussia  and  the  creation  of  new  joint 
stock  companies,  and  the  paper  of  many  of  these  companies 
was  refused  acceptance  by  the  Bank  of  Prussia.  The  specu- 
lators transferred  their  operations  to  Vienna  and  in  the  first 
quarter  of  1873  $140,000,000,  of  so-called  securities,  but  with 
little  real  security  behind  them,  were  issued  at  the  Austrian 
capital.  The  Bank  of  Austria  was  permitted  to  loan  largely 
on  such  securities,  in  order  to  keep  the  speculators  from 
failure,  but  on  May  27th,  the  morrow  of  the  opening  of  the 
International  Exposition,  seventy  failures  occurred,  and  on 
the  next  day  no,  involving  establishments  of  the  first  im- 
portance. The  Bourse  was  closed,  the  government  sus- 
pended the  limit  upon  the  note  issues  of  the  bank,  loans 
were  made  by  the  Treasury,  and  a  syndicate  of  bankers  was 
formed  to  make  advances  on  sound  securities.1  A  general 
panic  was  thus  prevented,  but  credit  was  so  far  impaired 
that  it  was  not  until  1875  that  business  in  Austria  resumed 
its  wonted  activity. 

The  forced  liquidations  of  the  Franco- Prussian  War  caused 
severe  pressure  for  a  short  time  upon  the  reserves  of  the 
Bank  of  England  ;  but  the  early  effect  of  the  war,  in  driving 
international  exchanges  to  London  and  Belgium,  and  send- 
ing capital  there  for  safekeeping,  was  to  flood  the  bank  with 
money  and  to  carry  the  discount  rate  downward  from  six 
per  cent,  on  August  4th  until  it  touched  two  and  a  half  per 
cent,  on  September  29th.  The  terms  of  settlement  of  the 
French  indemnity  kept  money  in  Great  Britain  for  a  time, 
and  it  was  eagerly  absorbed  at  low  rates  by  traders  and 
manufacturers."  The  determination  of  Germany  to  establish 
the  gold  standard,  and  the  heavy  credits  she  had  accumu- 
lated in  London,  began  in  1873  to  draw  gold  away  from 
England,  but  the  raising  of  the  discount  rate  at  the  Bank  of 
England,  until  it  touched  nine  per  cent,  on  September  25, 
1873,  attracted  gold  back  from  the  Continent,  Australia,  and 

1  Juglar,  495. 

9  Gilbart,  II.,  385. 

33 


514          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

India,  and  1873  and  1874  passed  away  with  comparatively 
little  disturbance. 

The  crisis  in  Great  Britain  was  delayed  until  1875,  when 
several  large  firms  doing  business  in  South  America  went 
down.  In  May  came  the  collapse  of  the  Aberdare  Iron 
Company,  with  liabilities  of  over  ,£1,000,000,  which  dragged 
down  two  other  large  concerns  and  the  brokerage  firm  of 
Sanderson  and  Company,  with  liabilities  of  about  ,£7,000,- 
ooo.  The  banks  maintained  a  firm  front  and  actual  panic 
did  not  occur  until  June  i5th,  when  Alexander  Collie  and 
Company,  East  India  merchants,  failed,  with  liabilities  esti- 
mated at  ,£3,000,000.  Thirty  firms  followed  them  into  the 
ditch  during  the  following  week  and  it  was  found  that  these 
firms,  as  in  the  case  of  those  connected  with  the  Aberdare 
Iron  Company,  were  simply  tools  of  Collie  and  Company,  in 
floating  their  paper.  The  Bank  of  England  was  well  equip- 
ped with  bullion  and  notes,  and  sound  firms  were  liberally 
assisted,  without  any  advance  in  the  rate  of  discount,  which 
was  only  three  and  a  half  per  cent.  Many  small  firms  went 
to  the  wall,  but  Great  Britain  was  touched  lightly  by  the 
crisis  and  confidence  was  only  briefly  shaken  in  1875.  The 
experience  of  1878,  when  the  City  of  Glasgow  Bank  failed 
with  liabilities  of  ,£12,404,297,  was  also  creditable  to  the 
soundness  and  conservatism  of  British  banking.  The  banks 
increased  their  deposits  in  the  Bank  of  England  ,£7,000,000, 
while  they  drew  down  the  cash  reserves  of  the  bank  about 
,£4,000,000.  They  thus  strengthened  themselves  by  actual 
cash  in  hand  or  credits  on  the  Bank  of  England  to  the 
amount  of  .£11,000,000.  Several  important  failures  occurred 
during  the  autumn  of  1878,  including  that  of  the  West  of 
England  Bank  at  Bristol,  on  December  gth,  with  liabilities 
of  about  .£5,000,000,  but  the  crisis  gradually  passed  off  dur- 
ing 1879  without  a  general  run  upon  the  solvent  banks. 


The  Crisis  of  1882-84.. 

The  crisis  in  1882  in  Europe,   which  reacted   upon  the 
United  States  in   1884,  was  most  severe  in  its  economic  ef- 


THE  LATER   CRISES  OF   THE   CENTURY.  515 

fects  iii  France,  which  had  escaped  the  effects  of  the  crisis 
of  1873  by  the  forced  liquidation  of  the  Franco-Prussian  War. 
The  severity  of  the  crisis  in  France  was  due  in  a  large  meas- 
ure to  the  education  in  the  employment  of  negotiable  securi- 
ties which  was  afforded  by  the  payment  of  the  great  war 
indemnity.  The  masses  of  the  French  people,  little  accus- 
tomed up  to  that  time  to  any  form  of  saving  but  in  coin  and 
lands,  emptied  their  hoards  in  the  purchase  of  national  se- 
curities, partly  from  a  great  outburst  of  patriotic  feeling,  but 
partly  also  because  they  felt  that  the  guarantee  of  the  gov- 
ernment gave  safety  and  tangibility  to  engraved  pieces  of 
paper,  which  under  other  circumstances  they  would  have 
refused  to  look  upon  as  a  sensible  investment.  The  habit 
of  accepting  such  securities  once  formed,  and  the  advantage 
derived  from  their  regular  returns  once  enjoyed,  it  became 
easier  to  tempt  the  French  peasant  and  workman  to  experi- 
ment with  other  securities  of  a  less  certain  guarantee.1  In- 
vestment societies,  trust  companies,  and  syndicates  sprang 
up  like  mushrooms  in  the  speculative  atmosphere  of  Paris, 
and  those  which  were  upon  too  grand  a  scale  for  any  but 
the  great  financiers  and  the  rich  had  their  imitators  among 
the  adventurers  of  the  street,  who  accepted  gratefully  in  in- 
stalments the  petty  savings  of  the  poor.8  The  loans  of  the 
Credit  Fonder  swelled  from  50,000,000  francs  in  1879  to 
278, ooo, ooo  francs  in  1881,  while  the  Credit  General  Fran $aisy 
the  Union  Ge'ne'rale,  and  the  Banque  de  la  Loire  were  types 
of  great  investment  companies  whose  shares  ran  brief  careers 
of  extravagant  advances  in  price.3 

It  was  not  in  France  alone  that  speculation  assumed  a 
new  development  in  the  eighth  decade  of  the  century.  Specu- 
lation in  earlier  times  had  been  largely  limited  to  the  raw 
materials  and  finished  products  of  commerce,  and  the  burst- 
ing of  the  bubble  had  come  when  high  prices  made  goods 
unmarketable  and  continuances  of  loans  at  the  old  rates 
could  no  longer  be  obtained  at  the  banks.  The  much  more 

1  Leroy-Beaulieu,  II.,  218. 
'Jannet,  385-86. 
3  Juglar,  435. 


516          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

complicated  structure  of  modern  commerce,  the  distribution 
of  risks  by  margins  and  futures,  sales  for  report  and  arbi- 
trage, and  the  diffusion  of  savings  and  the  taste  for  invest- 
ment among  all  classes  in  civilized  states,  have  given  a  new 
character  to  speculation  and  made  the  stock  market  a  more 
sensitive  barometer  of  business  conditions  than  the  more 
sluggish  merchandise  markets.  Securities  have  become  the 
most  convenient  means  of  settling  international  balances, 
and  by  their  unrecorded  transfers  have  impaired  the  value 
of  the  statistics  of  visible  commerce.  They  have  become  in 
a  large  measure  a  substitute  for  money  and  have  to  be  con- 
sidered in  dealing  with  monetary  problems.  The  steady  rise 
of  national  securities  in  recent  years  has  been  chiefly  the 
result  of  the  falling  interest  rates  on  capital  and  their  safety 
as  temporary  investments,  but  shrewd  speculators,  by  play- 
ing upon  the  ignorance  of  investors,  have  convinced  them 
that  the  other  securities  upon  the  market  were  sure,  in  their 
hands,  to  pursue  the  same  ascending  course.  Intoxicated 
by  this  prospect  of  paper  riches,  investors  have  measured 
their  expenditures  by  their  assumed  wealth,  have  furnished 
occupations  for  the  ministers  of  luxury,  and  have  brought 
perturbation  into  the  entire  economic  order.1 

Marginal  profits  in  stock  speculations  depend  in  several 
ways  upon  low  rates  for  money,  and  these  disappeared  in 
England  and  France  during  the  autumn  of  1881.  The 
United  States  resumed  specie  payments  on  January  i,  1879, 
and  the  current  of  gold  drawn  towards  the  country  by  the 
operations  of  the  treasury  was  swelled  by  the  abundant  crops 
and  large  exports  of  the  years  which  immediately  followed. 
The  merchandise  exports  from  the  United  States  in  1881  were 

1  "These  effects  of  growing  wealth  have  their  effect  even  upon  the- 
public  finances.  Transactions  being  more  numerous  and  being  made 
at  higher  prices,  the  registration  taxes  give  larger  revenues.  It  is 
thus,  that  from  1875  to  1881,  the  receipts  of  the  Treasury  exceeded 
the  official  estimates  by  580,701,788  francs,  and  this  was  made  the  oc-' 
casion  by  the  party  in  power  for  launching  into  foolish  expenses,  in 
the  famous  plan  of  public  works  of  M.  Freycinet  and  the  purchase  of 
little  railway  lines,  which  resulted  in  a  series  of  loans  in  profound 
peace."— Jannet,  392. 


THE  LATER   CRISES  OF   THE   CENTURY.  517- 

$902,377,346, — an  amount  never  before  equalled,  and  never 
equalled  afterwards  until  1892.  The  excess  of  exports  over 
imports  of  merchandise  was  $264,661,666  in  1879,  $167,683,- 
912  in  1880,  and  $259,712,718  in  1881.  Europe  was  suffer- 
ing from  a  deficiency  of  crops,  for  which,  in  the  language 
of  Mr.  Wells,  "in  respect  to  duration  and  extent,  there  had 
been  no  parallel  in  four  centuries."  The  tide  of  gold,  which 
had  been  outward  for  sixteen  years,  turned  towards  America 
in  1878,  and  the  net  gold  imports  were  $77,119,371  in  1880, 
and  $97,466,127  in  1881.  The  Bank  of  France  found  its  re- 
serve falling  in  the  autumn  of  1881,  and  endeavored  to  avoid 
too  sharp  an  advance  in  the  discount  rate  by  paying  light 
coin  and  charging  a  premium  for  bullion.  The  Bank  of 
Kngland  raised  its  discount  rate  on  October  6th  from  four 
to  five  per  cent.,  and  the  Bank  of  France  followed  with  a 
like  advance  on  October  2oth.  The  crash  came  in  Paris 
and  Lyons  in  January,  1882,  with  the  collapse  of  the  Union 
G£n£rale  and  a  fall  in  all  classes  of  securities.  The  Lyons 
brokers  sought  and  obtained  succor  from  the  Bank  of  France, 
to  the  amount  of  100,000,000  francs,  upon  securities  which 
would  not  ordinarily  have  been  accepted,  and  the  Paris 
agents  of  exchange  obtained  80,000,000  francs,  upon  the 
guarantee  of  a  syndicate  of  bankers.  The  sum  of  ,£924,000 
was  withdrawn  from  the  Bank  of  England  for  France  on 
January  3Oth,  and  ,£2, 000,000  was  drawn  out  during  the 
week.  The  Bank  of  England  discount  rate  was  advanced 
on  February  2d  to  six  per  cent.,  and  private  bankers,  con- 
trary to  their  usual  custom,  raised  their  rates  to  that  of  the 
bank.2 

The  counter-stroke  of  the  crisis  in  the  United  States, 
which  was  delayed  until  1884,  was  more  financial  than 
economic,  but  the  multitude  of  failures  caused  intense  alarm 
for  a  time  and  threatened  to  bring  business  to  a  standstill. 
The  Marine  Bank  of  New  York  suspended  on  May  5th, 
closely  followed  by  the  failure  of  the  Metropolitan  Bank,  the 
exposure  of  the  peculiar  methods  of  John  C.  Eno,  Ferdinand 

1  Recent  Economic  Changes,  6. 

2  Juglar,  396. 


518         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

Ward,  and  George  I.  Seney  and  the  collapse  of  smaller 
houses  connected  with  them.  Money  went  to  one  per  cent. 
a  day,  the  interior  banks  began  to  draw  heavily  upon  their 
New  York  reserves,  and  it  was  hardly  possible  to  obtain 
cash  or  credit  upon  the  best  securities.1  The  decision  of  the 
associated  banks  to  issue  Clearing-House  certificates  calmed 
the  storm  by  degrees,  but  the  failures  of  the  year  were  com- 
puted to  show  liabilities  of  $240,000, coo,2  and  deposits  in 
the  national  banks  fell  from  $i, 060, 778, 388  on  April  24th  to 
$979,020,349  on  June  20,  1884. 

The  Crisis  of  1890. 

The  crisis  of  1890  afforded  a  striking  illustration  of  the 
better  understanding  of  such  events  which  has  arisen  within 
the  past  half  century,  and  of  the  success  of  skilful  and 
courageous  financiers  in  dealing  with  them.  The  partic- 
ular cause  of  the  crisis  was  the  heavy  loans  through  the 
Barings  to  the  Argentine  Republic,  but  the  years  preceding 
1890  had  been  marked,  as  in  other  such  periods,  by  excessive 
speculation,  the  increase  of  joint  stock  companies  and  the 
inflation  of  prices.  A  part  of  this  tendency  to  speculation 
was  attributed,  as  in  the  case  of  the  crisis  of  1837,  to  the 
conversion  of  the  public  stocks  or  Consols  in  1888,  under 
the  management  of  Chancellor  Goschen,  from  three  per  cent. 
to  two  and  three-quarters  per  cent.  The  returns  of  the  reg- 
istrar of  joint  stock  companies  showed  the  total  amount  of 
capital  registered  during  1888  to  have  been  ,£353,781,594, 
and  in  1889  ^241,277,468,  while  the  loans  to  the  Argentine 
Republic  alone  in  those  two  years  were  stated  at  ,£36,102,- 
766  in  1888,  and  ,£29, 223, 341  in  iSSg.s  Railway  earnings 

1  It  is  apropos  of  this  crisis  that  Mr.   Henry  Clews  remarks  that, 
"  Were  the  banks  allowed  to  use  their  reserves  under  such  circum- 
stances,  a  fund  would  be  provided  for  mitigating  the  force  of  the 
crisis,  and  the  danger  might  be  gradually  tided  over  ;  but,  as  it  is, 
the  banks  can  legally  do  little  or  nothing  to  avert  panic  ;  on  the  con- 
trary, the  law  compels  them  to  take  a  course  which  precipitates  it."— 
Twenty-eight  Years  in  Wall  Street,  161. 

2  Juglar,  477. 

3  Journal  of 'the  Institute  of  'Bankers,  Jan.,  1891,  XII.,  I. 


THE  LATER   CRISES  OF   THE   CENTURY.  519 

i 

were  increasing,  clearing-house  transactions  were  multiply- 
ing, and  the  securities  of  the  South  American  republics  were 
eagerly  accepted  by  investors  under  the  endorsement  of 
such  a  house  as  the  Barings. 

Money  had  been  poured  into  the  Argentine  Republic  for 
the  development  of  banking,  public  works,  and  retail  trade, 
until  the  natives  might  well  have  been  convinced  that  their 
credit  in  London  was  without  limit.  A  boom  began  in  1886 
which  carried  up  the  price  of  lands,  which  a  few  years  before 
could  be  had  almost  for  the  taking,  to  $50,000  per  league, 
while  suburban  lots  bounded  upward  from  a  few  cents  to 
several  dollars  per  square  metre.  Extravagance  and  luxury 
ruled  among  the  governing  classes,  and  the  banks  which 
were  opened  in  1887  under  the  Guaranteed  Banking  Law 
advanced  money  without  security,  by  the  hundreds  of  thou- 
sands to  men  of  prominence  and  by  the  thousands  to  their 
humbler  followers.  The  requirement  of  payment  by  instal- 
ments disclosed  the  fact  that  the  banks  had  made  many  bad 
debts,  and  it  soon  appeared  that  these  had  been  covered  up 
for  a  time  by  fraudulent  over-issues  of  bank-notes.  The 
legal  circulation,  which  amounted  to  $160,000,000,  or  about 
$40  per  capita,  was  increased  by  the  fraudulent  issue  of 
$50,000,000  to  $60,000,000  in  additional  paper.  The  Na- 
tional Bank,  alone,  exceeded  its  limit  $26,000,000.  Notes 
supposed  to  be  redeemed  were  constantly  reissued,  and  when 
the  crash  came  paper  money  was  so  discredited  that  gold 
went  to  a  premium  of  three  hundred  in  paper,  and  tickets 
for  a  few  cents  were  issued  by  barbers  and  retail  stores 
to  take  the  place  of  the  small  coins  which  disappeared.1 

The  interest  rate  at  the  Bank  of  England  was  gradually 
lowered  during  1890,  from  six  per  cent,  on  February  2oth,  to 
three  per  cent,  on  April  iyth,  where  it  remained  until  June 
26th.  It  was  then  raised  to  four  per  cent.,  and  afterwards  to 
five  per  cent.,  where  it  stood  on  Thursday,  November  6th. 
Uneasiness  began  to  be  felt  among  well  informed  bankers 
over  the  increase  in  the  acceptances  assumed  by  the  Barings 

1  "  Gaucho  Banking,"  London  Bankers'  Magazine,  Jan.,  1891,  LI., 
37-47- 


520          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

and  other  houses,  and  the  decline  of  securities  indicated  a 
more  pressing  demand  for  money  and  a  slackening  of  busi- 
ness activity.  The  bank  rate  was  advanced  to  six  per  cent, 
on  Friday,  November  yth,  and  ugly  rumors  were  afloat  in 
Bombard  Street.  The  real  cause  of  the  uneasiness  among 
the  great  financiers  did  not,  however,  become  public  property 
until  a  week  later.  It  was  made  known  on  November  8th,  to 
the  Governor  of  the  Bank  of  England,  Mr.  William  L,id- 
derdale,  fortunately  a  man  of  great  ability  and  decision  of 
character,  that  the  Barings  were  on  the  eve  of  suspending 
payment,  with  liabilities  of  ^21,000,000. 

Mr.  L,idderdale  believed,  in  spite  of  the  unfortunate  his- 
tory of  previous  crises,  that  measures  could  be  adopted  which 
would  prevent  a  crash.  He  accordingly  perfected  arrange- 
ments within  the  following  week,  by  which  the  Bank  of 
England  was  able  to  announce  on  November  i4th  that  all  the 
liabilities  of  Baring  Brothers  and  Company  would  be  pro- 
vided for  by  the  bank,  and  that  any  loss  to  the  bank  would  be 
made  good  by  a  circle  of  guarantors  embracing  the  greatest 
institutions  of  Great  Britain.  The  joint  stock  banks  of 
London,  the  leading  banks  of  the  provinces,  and  the  joint 
stock  banks  of  Scotland  entered  into  a  combination  aggre- 
gating ^15,000,000,  ''to  make  good  to  the  Bank  of  Eng- 
land any  loss  which  may  appear  whenever  the  Bank  of 
England  shall  determine  that  the  final  liquidation  of  the 
liabilities  of  Messrs.  Baring  Brothers  and  Company  has  been 
completed,  so  far  as  in  the  opinion  of  the  governors  is  prac- 
ticable." This  guarantee  was  to  continue  for  three  years, 
and  afforded  absolute  assurance  to  the  business  community 
that  no  great  losses  to  individuals  and  respectable  houses 
would  occur.  The  Chancellor  of  the  Exchequer  was  in 
constant  consultation  with  Mr.  Lidderdale  while  the  ne- 
gotiations for  the  guarantee  were  going  on  and  offered  him 
the  benefit  of  the  suspension  of  the  Bank  Act  of  1844,  so  as 
to  permit  the  issue  of  additional  notes,  if  he  thought  it  desi- 
rable, but  Mr.  Lidderdale  declined  to  foster  alarm  by  admit- 
ting the  necessity  for  the  classic  remedy  of  the  great  crises 
of  1847,  1857,  and  1866. 


THE  LATER   CRISES  OF   THE   CENTURY.  $21 

Mr.  Lidderdale  preferred  to  keep  within  the  law,  and  at 
the  same  time  to  equip  the  bank  with  the  means  of  meeting 
heavy  demands  for  notes,  by  borrowing  gold  from  France, 
Russia,  and  other  sources.  The  sum  of  ,£3,000,000  in  gold 
was  brought  over  under  a  special  contract  with  the  Bank  of 
France,1  ,£1,500,000  was  obtained  from  St.  Petersburgh,  and 
,£500,000  was  drawn  from  other  sources.  All  this  sum  of 
,£5,000,000  thus  became  available  as  the  guarantee  of  addi- 
tional note  issues  if  the  pressure  for  money  should  become 
serious.  Mr.  Lidderdale  would  not  even  alarm  the  commu- 
nity by  forcing  up  the  rate  of  interest  to  an  extreme  point, 
but  maintained  it  at  six  per  cent,  and  insisted  that  the  great 
joint  stock  banks  should  continue  discounting,  as  usual.2 
These  measures  were  so  successful  that  the  period  of  stress 
was  passed  without  actual  panic  and  liquidation  set  in  with- 
out important  failures.  The  note  issues  of  the  Bank  of 
England  increased  from  ,£34,507,580  on  November  I2th  to 
,£39,939,900  on  November  26th,  but  the  increase  was  almost 
exclusively  in  the  notes  held  in  the  banking  department  and 
there  was  no  unusual  pressure  for  currency. 

The  firm  of  Baring  Brothers  and  Company  was  reorganized 
as  a  limited  company  with  a  capital  of  ,£1,000,000,  and  made 
arrangements  to  continue  business.  The  affairs  of  the  Ar- 
gentine Republic  were  found  in  an  extremely  bad  shape  and 
have  not  yet  been  entirely  adjusted,  but  the  surplus  resources 
of  the  Barings  enabled  a  gradual  reduction  of  their  liabilities 
outstanding  at  the  time  of  the  failure.  The  adjustment 
proceeded  so  rapidly  that  Mr.  David  Powell,  the  Governor 
of  the  Bank  of  England,  was  able,  at  a  general  court  held  011 
March  16,  1893,  to  make  the  following  report  : 3 

The  liabilities,  which  have  been  increased  during  the  past  six 
months  by  a  claim  from  the  executors  of  the  late  T.  C.  Baring,  now 


1  This  loan  was  secured  by  the  deposit  of  Exchequer  bonds  issued  to 
the  Bank  of  England  by  the  British  Government,  in  exchange  for 
national  debt  stock.    The  cost  of  the  transaction  was  ^"100,000,  be- 
sides interest. — Pol.  Science  Qua^ly,  March,  1894,  IX.,  23. 

2  MacLeod,  Theory  of  Credit,  II.,  836. 

3  London  Bankers'  Magazine,  April,  1893,  L/V.,  610. 


522          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

stand  at  ,£"4,558,813,  while  the  value  of  the  assets  under  the  new  es- 
timate stands  at  ^4,908,935,  giving  an  apparent  surplus  of  ^"350,122. 
It  will  be  seen  that  progress,  though  not  so  rapid  as  in  the  previous 
six  months,  has  been  made  in  the  liquidation,  the  debt  to  the  bank 
having  been  reduced  in  the  past  six  months  by  ^625,000.  It  may  be 
well,  however,  to  remind  you  how  much  has  been  effected  since  the 
guarantee  was  set  on  foot.  The  liabilities,  which  in  the  aggregate 
reached  a  total  of  ^30,313,000,  have  been  reduced,  in  a  period  of  about 
two  years  and  a  quarter,  to  ^4,558,813  ;  nearly  the  whole  of  the 
"bills  receivable,"  "remittances  to  come  forward,"  etc.,  amounting 
to  ^  i,  1 93, 664,  have  been  got  in  without  loss,  and  securities  have 
been  realized  to  the  value  of  ^4,560,523.  It  will  be  remembered  that 
the  period  of  three  years,  for  which  the  guarantees  were  originally 
given,  will  expire  in  November  next,  and,  looking  to  the  question 
how  far  the  liquidation  could  be  carried  out  without  material  loss  be- 
fore that  date,  it  was  felt  desirable,  in  the  interests  of  the  guarantors, 
that  the  time  should  be  extended  ;  and  I  am  happy  to  be  able  to  say, 
that  practically  the  whole  body  of  guarantors  have  consented  to  con- 
tinue their  guarantee  for  one-fourth  of  the  original  amount — which  is 
all  that  is  required — for  one  year  certain  from  November  next,  and 
for  a  further  period  of  one  year  if  deemed  expedient  in  the  inter- 
ests of  the  guarantors. ! 

The  intimate  connection  between  the  world's  markets  is 
indicated  by  the  fact  that  the  withdrawal  of  British  deposits 
in  Australia  caused  a  stringency  which  foreshadowed  the 
crisis  of  1893,  and  that  the  Imperial  Bank  of  Germany  for- 
bore for  a  time  making  drafts  upon  London.2  The  strin- 
gency which  occurred  in  the  United  States,  however,  in  the 
autumn  of  1890  came  before  the  Baring  crisis  and  was  less 
intimately  related  to  that  event  than  to  the  accumulation  of 
surplus  revenues  in  the  Treasury.  This  had  been  so  serious 
a  danger  for  several  years  that  Secretary  Fairchild  in  1888 
deposited  a  large  part  of  the  surplus  in  national  banks,  while 
he  extended  the  policy,  which  he  had  already  inaugurated, 
of  purchasing  unmatured  bonds  at  a  premium.  The  pur- 
chase of  bonds  was  continued  by  Secretary  Windom,  and 
was  pursued  on  a  large  scale  during  the  summer  and  autumn 

1  The  guarantors  were  relieved  of  further  liability  towards  the  close 
of  1894,  and  the  further  settlements  were  undertaken  by  a  private 
company. 

8Jannet,  113. 


THE  LATER   CRISES  OF   THE   CENTURY.  523 

of  1890.  "The  amount  of  public  money  set  free  within 
seventy-five  days  by  these  several  disbursements,"  Secretary 
AVindom  declared,  referring  to  circulars  issued  up  to  Septem- 
ber 6th,  "  was  nearly  $76,660,000,  and  the  net  gain  to  circu- 
lation was  not  less  than  forty-five  millions  of  dollars,  yet 
the  financial  conditions  made  further  prompt  disbursements 
imperatively  necessary."  Another  offer  to  purchase  these 
bonds  was  issued  on  September  13,  1890,  and  the  total  dis- 
bursements between  June  3Oth  and  the  close  of  September 
were  $98,276,682,  of  which  $75,828,200  was  on  the  principal 
of  bonds  redeemed  and  the  remainder  for  interest  and  premi- 
ums. The  resources  of  the  Treasury  were  practically  ex- 
hausted and  no  assistance  could  be  given  to  the  money 
market  when  the  reflex  action  of  the  Baring  crisis  was  felt 
two  months  later  in  the  United  States.  A  number  of  im- 
portant failures  occurred,  but  the  more  disastrous  results  of 
the  exhaustion  of  the  Treasury  were  reserved  for  1893. 

1  Finance  Report,  1890,  xxix. 


*  CHAPTER   XXII. 

THE  CRISIS   OF    1893. 

The  Reverberation  of  the  Baring  Crash  over  Europe,  America,  and 
Australia — Distrust  of  American  Silver  Legislation — The  Failure 
of  the  Brussels  Conference,  the  Suspension  of  Free  Coinage  in 
India,  and  the  Coming  of  the  Panic — The  Shrinkage  of  Values 
— Repeal  of  the  Sherman  Law  and  the  Bond  Contract  of  1895 
— Land  Speculation  and  Bad  Banking  in  Australia. 

THE  financial  crisis  of  1893  was  in  a  large  measure  an 
afterclap  of  the  Baring  failure  in  1890.  Many  mil- 
lions of  British  money  had  been  invested  in  American 
and  Australian  securities  and  the  discredit  which  fell  upon 
Argentine  and  other  South  American  investments  with  the 
failure  of  the  Barings  resulted  in  an  irresistible  movement 
to  unload  such  securities  and  transfer  European  capital  to 
home  investments.  Such  a  tendency  would  in  itself  have 
seriously  crippled  the  great  enterprises  carried  on  in  the 
United  States,  South  America,  and  Australia  on  foreign  capi- 
tal, even  if  those  countries  had  not  been  in  any  way  at  fault. 
Results  proved  that,  while  credit  rested  upon  no  such  rotten 
basis  in  the  United  States  and  Australia  as  in  Argentina, 
there  had  been  much  sinking  of  circulating  capital  in  unpro- 
ductive enterprises  and  a  tendency  towards  unwise  economic 
policies  which  had  fettered  the  industries  of  those  countries 
and  driven  gold  from  its  legitimate  place  in  their  monetary 
circulation.  Circumstances  which  might  have  impaired 
American  and  Australian  credit  under  any  conditions  were 
emphasized  by  the  general  distrust  aroused  by  the  Baring 
failure  and  it  required  only  the  rude  test  of  the  withdrawal 
of  foreign  support  to  confirm  the  suspicions  of  foreign  inves- 

524 


THE   CRISIS  OF  1 893.  $2$ 

tors  and  bring  to  a  head  the  real  evils  of  the  economic 
situation. 

The  first  shock  was  felt  in  Australia,  whose  people  had 
been  congratulating  themselves  upon  their  rapidly  accumulat- 
ing wealth  and  their  swelling  bank  credits,  based  in  reality 
upon  inflated  valuations  of  real  estate  and  of  agricultural 
products.  The  shock  was  soon  communicated  to  the  United 
States  and  its  reverberations  affected  the  stock  markets  of 
Berlin  and  Vienna,  checked  the  efforts  of  Austria-Hungary 
to  establish  the  gold  standard,  and  drove  Austrian  securities 
homeward  from  Germany  as  the  result  of  the  scramble  for 
ready  cash  in  the  Berlin  market.  Italy  was  affected  by  the 
prevailing  distrust,  and  the  evils  generated  by  corruption 
among  her  bankers  and  public  men  were  intensified  by  the 
return  of  Italian  securities  and  the  steady  outflow  of  gold 
and  even  of  subsidiary  silver  coins  under  the  pressure  of  a 
depreciated  paper  currency.  The  Credit  Mobilier  Italien, 
with  a  capital  of  75,000,000  lires  ($14, 500,000),  was  forced 
to  suspend  by  the  difficulty  of  calling  up  advances,  with  de- 
posits of  50,425,000  lires  and  advances  of  89,109,000  lires.1 
France  saw  her  importations  shrink  from  4, 767, 867,0x30  francs 
($920,000,000)  in  1891  to  3,936,720,000  francs  ($760,000,000) 
in  1893.  Even  Turkey  suffered  from  the  fall  in  the  prices 
of  the  products  of  agriculture,  which  constitute  the  larger 
part  of  her  exportations.  Opium  within  the  space  of  a  few 
years  fell  twenty-four  per  cent.,  wool  fifteen  percent.,  and 
raisins  eight  per  cent.2 

The  crisis  in  the  United  States  attracted  the  most  aften- 
tion,  because  of  the  magnitude  of  their  commercial  interests 
and  of  the  investments  of  foreign  capital  in  their  railways, 
breweries,  cattle  ranges  and  public  securities.  Foreign  in- 
vestments in  the  United  States  would  have  required  large 
payments  to  Europe  prior  to  1893  if  American  enterprises 
had  not  proved  up  to  that  time  so  attractive  that  the  interest 
upon  them  was  constantly  reinvested.  The  result,  accord- 
ing to  the  acute  observation  of  M.  Arthur  Raffalovich,  was 

1  Revue  dcs  Banques,  Jan.,  1894,  XIII.,  15. 

2  Revue  des  Banques,  Au~.,  1894,  XIII.,  166. 


526          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

that  ' '  the  true  indebtedness  of  the  United  States  abroad  had 
been  completely  hidden  by  the  influx  of  foreign  capital. 
What  the  nation  had  to  pay  in  interest  on  railway  and 
municipal  obligations  and  industrial  investments  had  never 
been  felt  as  a  charge  upon  commerce,  in  consequence  of  the 
compensation  which  resulted  from  the  uninterrupted  entry 
of  capital  placed  by  Europe."1  The  withdrawal  of  this 
capital, — even  the  mere  suspension  of  the  process  of  rein- 
vesting it, — meant  heavy  payments  in  gold  or  merchandise 
to  Europe,  without  compensation  in  returning  gold  or  goods. 
The  annual  payments  required  to  Europe,  outside  those  com- 
pensated by  American  exports,  were  estimated  by  Mr.  Heidle- 
bach,  a  New  York  banker,  at  $350,000,000,  and  the  principal 
of  the  debt  upon  which  interest  was  due  was  computed  at  not 
less  than  two  billions  of  dollars.2  The  withdrawal  of  a  large 
portion  of  this  productive  loan  was  the  price  which  the  United 
States  were  called  upon  to  pay  for  political  manoeuvres  which 
aroused  the  fear  that  they  would  abandon  the  gold  standard 
and  make  silver  the  basis  of  their  monetary  system.3 


1  Le  Marche  Financier  en  1893-1894,  255. 

2  These  figures  were  largely  mere  estimates  until  a  careful  compu- 
tation was  made  in  the  Journal  of  Commerce  and  Commercial  Bulle- 
tin, July  8,   1895,  based  upon  inquiries  among  brokers,  steamship 
agents,  and  others  possessing  actual  knowledge.     This  investigation 
made  the  total  annual  indebtedness  to  Europe,  exclusive  of  merchan- 
dise movements  in  either  direction,  $175,475,000  and  the  credits  on 
the  other  side  $29,750,000,  leaving  a  net  indebtedness  by  the  United 
States  of  $145.725,000.    The  leading  debtor  item  was  $90,000,000  on 
investment  account,  which  would  represent  a  capital  of  at  least  $2,- 
500,000,000.     The  creditor  items  included  $14,000,000  brought  by  im- 
migrants, $14,850,000  for  outlays  of  foreign  vessels  in  American  ports, 
and  $1,900,000  for  outward  earnings  of  American  vessels.     These  fig- 
ures take  no  account  of  the  portion  of  the  annual  debt  which  may  be 
settled  by  new  securities. 

3  This  tendency  to  the  withdrawal  of  foreign  capital  was  observed  to 
some  extent  after  the  passage  of  the  Bland  bill  and  the  Senate  reso- 
lution offered  by  Senator  Matthews  of  Ohio,  that  the  obligations  of 
the  United  States  were  legally  payable  in  silver.      Vide  London  Econo- 
mist, September  28,  1878  ;  Leroy-Beaulieu,  II.,  229.     The  tendency 
only  became  marked,  however,  after  the  passage  of  the  law  of  1890. 


THE   CRISIS  OF 


527 


A  combination  of  influences  worked  together  to  induce  an 
unhealthy  condition  of  industry  and  finance  and  to  bring 
about  the  collapse  of  1893.  The  passage  of  the  Sherman 
silver  law  of  1890  was  not  the  absolutely  unique  cause  of 
the  crash  of  three  years  later,  but  it  contributed  powerfully 
to  that  result,  indirectly  as  well  as  directly.  The  withdrawal 
of  gold  from  the  United  States  Treasury  pursued  an  almost 
uninterrupted  course  from  the  moment  of  the  enactment  of 
the  Sherman  silver  law  until  the  outbreak  of  the  panic.  The 
following  table,  brought  down  for  convenience  to  a  more  re- 
cent date,  will  show  the  progress  of  this  depletion  of  the 
gold  reserve : 


DATE. 

TOTAL  GOLD   IN 
TREASURY. 

GOLD   CERTIFICATES 
IN  CIRCULATION. 

NET  GOLD  RESERVE. 

February  28,  1889 

$326,456,697 

$130,210,717 

$196,245,980 

June  30,  1889 

303,504,319 

116,792,759 

186,711,560 

December  31,  1889 

3I3,8l8,94I 

122,985,889 

I9°,833,052 

June  30,  1890 

321,612,424 

131,380,019 

190,232,405 

December  31,  1890 

293,O2O,2I4 

144,047,279 

148,972,935 

June  30,  1891 

258,518,122 

120,850,399 

117,667,723 

December  31,  1891 

278,846,750 

148,106,119 

130,740,631 

June  30,  1892 

255,577,705 

141,235,339 

114,342,367 

December  31,  1892 

238,359,801 

117,093,139 

121,266,663 

June  30,  1893 

188,455,432 

92,970,019 

95,485,413 

December  31,  1893 

158,303,779 

77,412,179 

80.891,600 

June  30,  1894 

131,217,434 

66,344,409 

64,873,025 

December  31,  1894 

139,606,354 

53,361,909 

86,244,445 

June  30,  1895 

155,893,931 

43,381,569 

107,512,362 

December  31,  1895 

113,198,707 

49,936,439 

49,845,507 

March  1  6,  1896 

171,356,965 

43,426,829 

127,930,136 

Gold  exports  began  in  large  volume  the  month  the  Sher- 
man law  was  approved  and  reached  a  total  in  the  fiscal  year 
1891  of  $86,362,654  ;  in  1892  of  $50,195,327  ;  and  in  1893 
of  $108,680,844.  There  were  imports  during  the  months  in 
which  the  American  crops  were  marketed,  but  the  three 
years  contributed  an  excess  of  exports  of  $68,130,087  in 
1891,  $495,873  in  1892,  and  $87,506,463  in  1893.  The  theory 
of  Gresham's  law,  that  the  departure  of  gold  denotes  the 
presence  of  a  poorer  currency  behind  the  gold,  expelling  it 
from  the  country,  was  verified  by  the  manner  in  which  the 


528          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

gold  went  out  as  the  new  Treasury  notes  were  pumped  into 
the  circulation  at  the  rate  of  $4,5(00,000  per  month.  The 
Treasury  notes  issued  undes  the  Sherman  law  up  to  June  30, 
1893,  were  $147>I9°>227  J  tne  net  Sold  exports  from  the 
United  States  from  June  30,  1890,  to  June  30,  1893,  were 
$156,132,423;  and  the  reduction  of  the  aggregate  gold  in 
the  Treasury  during  the  same  period  was  $i33>I56,99i- 
Other  causes  than  the  mere  addition  of  the  notes  to  the  cir- 
culating medium  doubtless  contributed  to  the  expulsion  of 
gold,  but  the  coincidence  of  these  three  items, — the  loss  of 
gold  by  the  Treasury,  its  export  from  the  United  States,  and 
the  issues  of  notes, — is  at  least  striking. 

From  the  moment  that  the  Sherman  law  was  enacted,  the 
Treasury  of  the  United  States  was  under  the  necessity  of 
constant  expedients  to  keep  its  gold  and  replenish  it  when  it 
was  lost.  The  government  availed  itself  of  every  opportu- 
nity to  obtain  gold  in  exchanges  when  there  was  a  demand 
for  small  notes  by  offering  greater  conveniences  to  those  who 
tendered  gold  in  exchange  for  paper  than  to  those  who  ten- 
dered other  forms  of  currency.  Appeals  to  the  generosity 
and  patriotism  of  the  national  banks,  which  still  held  a  con- 
siderable reserve  of  gold,  were  frequently  made  during  the 
autumn  of  1892  and  the  early  months  of  1893.  New  appeals 
of  this  sort  were  made  under  the  administration  of  President 
Cleveland  and  the  gold  reserve  was  increased  from  $90,722,- 
958  on  June  10,  1893,  to  $97,286,677  on  July  loth,  by  the 
efforts  of  a  banking  combination  in  New  York,  and  by  lead- 
ing bankers  of  Boston,  Baltimore,  Chicago,  and  Philadel- 
phia. 

These  devices  were  unavailing  to  permanently  arrest  the 
combined  effects  of  the  infusion  of  paper  into  the  currency 
and  the  period  of  speculation  and  large  imports  of  foreign 
merchandise  which  had  set  in.  Funds  were  raised  for  work- 
ing alleged  tin-mines  in  South  Dakota  ;  vast  tracts  of  land 
were  purchased  in  Florida  to  be  unloaded  as  sugar  lands 
upon  foreign  investors  under  the  guarantee  of  the  govern- 
ment bounty  upon  sugar  ;  and  new  towns  sprang  up  all  over 
the  South,  dowered  in  the  imagination  of  their  projectors 


THE   CRISIS  OF  1893.  $2$ 

with  infinite  possibilities  of  mineral  wealth  and  manufactur- 
ing development,  but  which  proved  in  fact  little  more  than 
bottomless  pits  for  the  millions  of  northern  capital  spent  in 
laying  them  out.  It  was  the  same  with  suburban  improve- 
ments in  the  neighborhood  of  the  great  cities  as  with  the 
1 '  boom ' '  towns  of  the  South.  Millions  were  sunk  in  improve- 
ments, in  advance  of  actual  demand,  upon  property  for 
which  no  purchasers  could  be  found  when  people  began  to 
ask  themselves  what  was  the  basis  of  reality  beneath  inflated 
and  fictitious  values.  Railroad  building  was  not  so  marked 
a  feature  of  the  years  preceding  the  panic  of  1893  as  of  earlier 
panics,  but  there  was  a  great  demand  for  capital  for  equipping 
street  railways  with  new  power  and  the  railways,  as  usual, 
were  among  the  first  to  feel  the  effects  of  slakening  industry.1 
The  conviction  that  the  country  was  upon  the  high  road  of 
prosperity  led  to  extravagant  expenditure  by  individuals, 
corporations,  municipalities,  and  the  Federal  government. 
Foreign  goods  poured  into  the  country  at  an  accelerating 
velocity  until  the  volume  of  imports  rose  from  $745,131,652 
in  1889  to  $866,400,922  in  1893.  The  scarcity  of  the  crops 
in  Europe  in  1891  caused  a  great  demand  upon  the  United 
States  to  supply  the  deficiency,  and  American  exports  of 
$1,015,732,011  in  the  fiscal  year  ending  June  30,  1892,  offset 
in  a  measure  the  stream  of  imports,  arrested  the  loss  of  gold, 
and  delayed  the  crisis  which  might  otherwise  have  sooner 
followed  the  operation  of  the  Sherman  law. 

The  relief  which  the  farmers  were  thus  enabled  to  bring 
to  the  fiscal  situation  of  the  country  was  but  temporary. 
Europe  was  just  recovering  from  a  crisis  and  a  part  of  the 


1  A  list  of  dividends  paid  in  1893  which  had  ceased  to  be  paid  in 
1895  showed  a  total  of  $61,710,000  per  year.  Capitalizing  this  at  five 
per  cent,  and  making  an  addition  for  smaller  concerns  not  included  in 
the  list,  "  the  bad  investments  of  the  public,  within  three  years,  came 
fully  up  to  $1,500,000,000  and  are  likely  to  exceed  it." — "Matthew 
Marshall "  in  New  York  Sun,  July  i,  1895.  This  list  included  no 
losses  on  real  estate  investments  and  none  in  industrial  enterprises, 
except  a  few  of  the  largest,  whose  shares  were  the  subject  of  trading 
on  the  New  York  Stock  Exchange. 

34 


530         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

payment  for  the  crops  of  1891  was  made  by  the  return  of 
American  securities  instead  of  the  shipment  of  gold.  Amer- 
ican exports  of  merchandise  fell  in  the  fiscal  year  1893  to 
$831,030,785  and  the  balance  of  trade  against  the  United 
States  for  the  six  months  ending  June  30,  1893,  was  $68,800,- 
021.  The  national  banks  of  the  East,  warned  by  the  Euro- 
pean crisis,  began  to  scan  their  loans  and  strengthen  their 
gold  holdings.1  The  failures  reported  by  Bradstreet's  Com- 
mercial Agency  in  April,  1893,  were  905,  as  compared  with 
703  in  the  same  month  of  1892,  and  the  number  increased 
to  969  in  May  as  compared  with  680  in  May  of  the  year 
before.  The  panic  did  not  become  acute,  however,  until  the 
middle  of  May.  The  Chemical  National  Bank  of  Chicago, 
with  a  capital  of  $1,000,000,  closed  its  doors  on  May  9th, 
and  was  followed  two  days  later  by  the  Columbia  National 
Bank  of  Chicago,  with  a  capital  of  an  equal  sum.  These 
suspensions,  accompanied  by  the  collapse  of  private  and 
State  banks  and  business  firms  and  corporations,  paralyzed 
credit  and  brought  the  country  to  the  verge  of  a  crisis. 

Upon  these  conditions  of  unstable  equilibrium  came  the 
shock  of  the  suspension  of  silver  coinage  in  British  India. 
There,  as  in  other  silver  using  countries,  the  fall  in  the  gold 
price  of  silver  had  brought  changes  in  values  and  difficulties 
of  administration  and  exchange.  The  United  States  had 
been  making  efforts  for  seventeen  years  to  avert  the  effects 
of  the  depreciation  of  silver  by  means  of  an  international 
bimetallic  union.  Congress  by  a  joint  resolution  of  August 
15,  1876,  appointed  a  joint  committee  of  eight  members, 
known  as  the  "Silver  Commission,"  which  submitted  an 
elaborate  report  on  March  2,  1877.  The  majority  of  this 
commission  reported  in  favor  of  * '  the  restoration  of  the 


1  Their  gold  holdings  increased  $22, 000,000  during  the  year  ending 
September  30,  1892,  which,  says  Comptroller  Hepburn,  "coupled  with 
the  known  fact  that  many  State  banks  and  trust  companies  have  also 
fortified  themselves  with  a  gold  reserve  during  the  year,  shows  that  the 
fear  that  we  were  drifting  towards  a  silver  basis  was  not  confined  to 
foreigners."  This  is  dated  December  5,  1892,  six  months  before  the 
crisis. 


THE   CRISIS  OF  1893.  531 

double  standard  and  the  unrestricted  coinage  of  both  met- 
als."1 The  other  three  members  did  not  favor  free  coinage 
by  the  United  States  without  the  concurrence  of  other 
nations.  The  United  States  took  the  initiative  in  proposing 
an  international  conference,  which  met  in  Paris  on  August 
10,  1878,  and  the  American  delegates  proposed  an  interna- 
tional agreement  for  the  equal  coinage  of  both  metals.  The 
majority  of  the  delegates  of  the  European  states  presented 
resolutions  declaring  "that  the  question  of  the  restriction 
of  the  coinage  of  silver  should  equally  be  left  to  the  discre- 
tion of  each  state  or  group  of  states,"  and  that  the  differ- 
ences of  opinion  which  had  developed  ' '  exclude  the  discussion 
of  the  adoption  of  a  common  ratio  between  the  two  metals."  a 
The  American  delegates — Mr.  R.  K.  Fenton,  Mr.  W.  S. 
Groesbeck,  General  Francis  A.  Walker,  and  their  secretary, 
Mr.  S.  Dana  Horton, — filed  a  protest  against  this  decision. 
A  second  attempt  to  secure  a  bimetallic  union  was  made 
in  the  summer  of  1881  by  the  concurrent  invitations  of  the 
American  and  French  governments.  Senator  Magnin,  the 
French  Minister  of  Finance,  presided  at  the  opening  of  the 
conference  and  indicated  a  part  of  the  reasons  for  its  meet- 
ing by  stating  that  the  resolutions  adopted  by  the  majority 
of  the  European  delegates  in  1878  were  adopted  when  the 
Dutch  delegates  were  not  present,  the  Italian  delegates  refused 
to  be  parties  and  the  approval  by  other  delegates  was  given 
only  under  reservations.  The  American  and  French  dele- 
gates, through  Mr.  Evarts,  lately  Secretary  of  State  of  the 
United  States,  again  urged  the  formation  of  a  bimetallic 
agreement,  and  the  delegates  of  the  European  states  voted 
"that  there  is  ground  for  believing  that  an  understanding 
may  be  established  between  the  states  which  have  taken 
part  in  the  conference  ;  but  that  it  is  expedient  to  suspend 
its  meetings. ' '  Upon  their  proposition ,  therefore,  an  adj  ourn- 


1  Reports  of  the  Silver  Commission  of  1876,  Sen.  Rep.  703,  44th 
Cong.,  2d.  Sess.,  126. 

*  International  Monetary  Conferrenceheld  in  Paris,  in  August,  1878, 
Sen.  Ex.  Doc.  58,  45th  Cong.,  3d  Sess.,  163. 


532          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

ment  was  taken  until  April  12,  1882,  but  the  conference  was 
never  reassembled.1 

The  last  attempt  to  secure  a  bimetallic  agreement  was 
made  at  the  suggestion  of  the  United  States  in  1892,  but  the 
invitations  were  limited  to  the  purpose  of  securing  a  larger 
use  for  silver.  The  British  government  was  unwilling  to 
enter  a  conference  with  the  declared  purpose  of  restoring  the 
free  coinage  of  both  gold  and  silver  and  the  form  of  the  in- 
vitations was  adapted  by  the  United  States  to  their  position, 
in  order  to  secure  their  participation  in  the  conference.  The 
delegates  of  the  United  States  were  Senator  Allison  of  Iowa, 
Senator  Jones  of  Nevada,  Representative  McGreary  of  Ken- 
tucky, Mr.  Henry  W.  Cannon  of  New  York,  formerly  Comp- 
troller of  the  Currency,  and  Professor  E.  Benjamin  Andrews, 
President  of  Brown  University  of  Providence,  Rhode  Island. 
Mr.  Terrell,  the  United  States  Minister  at  Brussels,  also  took 
part  in  the  conference  and  Mr.  Edward  O.  Leech,  the  Di- 
rector of  the  Mint,  was  an  advisory  delegate.  Several 
propositions  for  the  purchase  and  coinage  of  silver  on  gov- 
ernment account  in  limited  quantities  were  submitted  to  the 
conference,  but  it  was  again  found  that  an  agreement  could 
not  be  reached  and  an  adjournment  was  taken  on  December 
17,  1892,  until  May  30,  1893.  The  German  delegates  were 
unwilling  to  bind  their  government  to  the  policy  of  a  second 
meeting,3  and  the  events  of  the  winter  were  so  little  favor- 
able to  bimetallism  that  President  Cleveland  did  not  feel 
justified  in  seeking  a  reassembling  of  the  conference. 

These  several  efforts  to  restore  bimetallic  coinage  hardly 
arrested  for  a  moment  the  downward  course  of  silver,  and 
the  government  of  British  India  felt  that  they  could  no 
longer  await  the  distant  possibilities  of  international  action. 
The  fall  in  the  price  of  silver  caused  constantly  increasing 
difficulties,  because  of  the  heavy  interest  charges  payable  in 
London  and  the  diminishing  value  of  the  proceeds  of  taxa- 

1  Proceedings  of  the  International  Monetary  Conference  held  in 
Paris  in  1881  ;  Washington,  1887  ;  506. 

2  International  Monetary  Conference,  held  at  Brussels  under  the 
Act  of  August  5,  1892.— Sen.  Ex.  Doc.  82,  370. 


THE   CRISIS  OF  l8$J.  533 

tion  when  measured  in  gold.  It  was  not  merely  a  difficulty 
which  weighed  upon  the  local  administration,  but  it  affected 
every  British  officer  in  India  who  received  his  pay  in  silver 
rupees,  originally  worth  about  forty-eight  cents,  but  which 
had  been  steadily  declining  in  gold  value.  A  remittance  by 
bills  of  exchange  on  London  to  family  or  creditors  at  home 
meant  a  shrinkage  of  nearly  fifty  per  cent,  in  the  nominal 
value  of  the  money  received  in  India.  These  troubles  led  to 
the  appointment  of  a  special  committee  of  able  financiers  by 
the  Secretary  of  State  for  India  on  October  21,  1892,  who 
submitted  their  report  on  May  31,  1893. 

Rumors  of  the  character  of  the  report  of  the  Indian  Cur- 
rency Committee  began  to  circulate  in  London  early  in  June, 
but  their  proposals  still  lacked  the  sanction  of  executive 
action.  It  was  not  until  June  26,  1893,  that  it  was  officially 
announced  that  the  Legislative  Council  of  India  had  ordered, 
with  the  approval  of  the  home  government,  the  closing  of  the 
mints  to  the  free  coinage  of  silver  on  account  of  individuals. 
It  was  proposed  at  the  same  time  to  fix  the  exchange  value  of 
the  rupee  at  one  shilling,  four  pence,  or  the  equivalent  of  about 
thirty-two  cents  in  United  States  money.  Such  a  policy  had 
been  recommended  by  the  Committee  and  was  supported  by 
the  experience  of  Holland  and  Austria-Hungary,  which  had 
been  able  by  suspending  the  free  coinage  of  silver  to  float  a 
large  mass  of  silver  and  paper  currency  far  above  the  bullion 
value  of  the  silver  and  not  far  below  parity  in  gold.1  The 
net  imports  of  silver  into  India  for  the  nineteen  English 
official  years  ending  March  31,  1893,  were  $704,040,907,  or 
an  annual  average  of  $37,054,784,  which  had  been  much 
exceeded  during  the  last  eight  years  of  the  period.  The 
market  for  nearly  one-third  of  the  annual  production  of  the 
silver  mines  of  the  world  was  thus  closed  by  the  stroke  of  a 
pen  in  Downing  Street. 

The  news  of  the  action  of  the  British  government  caused 
a  profound  sensation  in  the  United  States  and  increased  the 
tendency  to  unreasoning  panic.  Secretary  Carlisle  had  al- 


Report  of  Indian  Currency  Committee,  Sec.  93-98. 


534          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

ready,  on  June  22d,  authorized  the  anticipation  of  the  July 
interest  on  the  four  per  cent,  bonds  and  the  Pacific  Railroad 
six  per  cent,  bonds,  with  a  view  to  bringing  the  slender 
resources  of  the  Treasury  to  the  relief  of  the  growing  string- 
ency in  the  money  market.  The  Treasury  was  practically 
exhausted  by  the  enormous  purchases  of  bonds  at  a  pre- 
mium in  the  autumn  of  1890  and  by  the  abolition  of  the  duty 
on  sugar  by  the  tariff  act  of  that  year,  and  the  gold  reserve 
was  already  below  $  100,000,000.  The  price  of  silver,  which 
was  36  pence  per  ounce  in  London  and  78  cents  in  New 
York  on  June  26th,  tumbled  to  30^  pence  in  London  and 
65  to  67  cents  in  New  York  on  June  3oth.  The  value  of  the 
bullion  holdings  of  the  government  shrivelled  by  this  change 
in  four  days  by  about  $37,000,000,  and  it  was  evident  that 
the  United  States  could  no  longer  afford  to  carry  alone  the 
burden  of  sustaining  the  price  of  silver. 

President  Cleveland  made  an  earnest  effort  to  secure  the 
repeal  of  the  Sherman  law  during  the  short  session  of  the 
Fifty-second  Congress,  before  taking  office,  as  he  had  done 
in  1885  to  secure  the  repeal  of  the  Bland  Silver  Act,  then 
in  force.  The  House  Committee  on  Coinage  in  the  Fifty- 
second  Congress  had  been  constituted  by  Speaker  Crisp  with 
a  majority  in  favor  of  free  coinage  and  of  continuing  in  force 
existing  laws  requiring  Treasury  purchases  of  silver.  It 
was  necessary,  therefore,  in  order  to  bring  before  the  House 
any  measure  repealing  the  Sherman  law,  to  have  it  reported 
from  another  committee.  Representative  Andrew  of  Boston 
was  one  of  the  first  to  discover  a  way  of  doing  this.  He 
introduced,  on  December  12,  1892,  a  bill  amending  the  na- 
tional banking  law,  but  containing  a  provision  repealing  the 
silver  purchasing  clause  of  the  Act  of  1890.  This  bill  was 
referred  under  the  rules  to  the  Committee  on  Banking  and 
came  before  the  House  on  February  gth,  by  means  of  a 
special  order  reported  by  the  Committee  on  Rules  for  its 
consideration.  The  order  was  not  satisfactory  in  form  to 
the  advocates  of  repealing  the  Act  of  1890,  and  its  adoption, 
by  a  vpte  of  152  to  143,  constituted  their  virtual  defeat.  The 
affirmative  vote  was  given  by  108  Democrats,  35  Republi- 


THE   CRISIS  OF  1 893.  535 

cans,  and  9  Populists  and  the  negative  vote  by  105  Democrats 
and  38  Republicans.  Several  conferences  were  held  with  a 
view  to  a  further  effort  to  secure  repeal  or  to  secure  a  reduc- 
tion of  silver  purchases,  but  no  plan  was  framed  which  was 
acceptable  to  the  Eastern  Republicans,  whose  votes  were 
necessary  to  make  a  majority  for  repeal.  President  Cleve- 
land caused  it  to  be  understood,  soon  afte-r  his  inauguration, 
that  he  would  not  summon  Congress  in  extra  session  before 
September  unless  a  serious  crisis  confronted  the  country. 
The  crisis  was  invoked  in  the  latter  days  of  June,  1893,  by 
the  closing  of  the  Indian  mints  and  the  effect  upon  the 
American  currency.  A  meeting  of  the  cabinet  was  held  on 
June  3oth,  at  which  the  increasing  number  of  suspensions 
by  the  banks  and  the  paralysis  of  business  were  fully  dis- 
cussed, and  it  was  decided  to  issue  a  proclamation  summon- 
ing Congress  in  extra  session  at  noon  on  the  yth  day  of 
August. 

The  summons  came  none  too  soon  and  did  little  to  stay  the 
progress  of  the  panic.  Banking  institutions,  national,  State, 
and  private,  were  daily  suspending,  depositors  were  with- 
drawing their  cash  from  the  banks,  and  industrial  enter- 
prises were  coming  to  a  halt.  Twenty-five  national  banks 
suspended  in  June, — a  number  never  before  exceeded  in  an 
entire  year, — seventy-eight  suspended  in  July,  and  thirty- 
eight  in  August.1  The  collapse  of  private  and  State  banks 
was  even  more  alarming.  An  average  of  about  seventy  sus- 
pensions per  year  up  to  the  close  of  1892  swelled  to  415  dur- 
ing the  first  eight  months  of  1893,  representing  liabilities  of 
$97,193,530.  Banks  all  over  the  country  began  to  refuse  to 
pay  checks  except  in  certified  or  clearing-house  checks,  cur- 
rency went  to  a  premium,  and  many  factories  were  obliged 
to  shut  down  for  lack  of  money  to  pay  their  employees. 
The  refusal  to  cash  checks  in  currency  and  the  premium 
offered  for  it  by  New  York  brokers  arrested  deposits  in  the 


1  Eighty-four  of  the  banks  afterwards  resumed  business.  The  capi- 
tal of  sixty-seven  national  banks  actually  insolvent  during  the  year 
ending  October  31,  1893,  was  511,035,000. 


536          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

banks,  but  brought  much  that  was  in  private  hoards  into  the 
market.1 

Some  conception  of  the  reduction  in  exchanges  caused  by 
the  panic  may  be  gathered  from  the  shrinkage  of  the  tran- 
sactions of  the  New  York  Clearing  House  from  $34,421,380,- 
870  for  the  year  ending  October  i,  1893,  10124,230,145,368 
for  the  year  ending  October  i,  1894.  The  comparison  for 
the  prosperous  month  of  October,  1892,  with  the  same  month 
of  1893,  showed  a  shrinkage  in  the  clearing  transactions  of 
the  leading  cities  of  the  United  States  from  $5,501,901,592 
to  $4,043,510,662.  The  clearings  throughout  the  leading 
cities  of  the  country  showed  a  shrinkage  from  $58,880,682,- 
455  for  the  year  ending  September  30,  1893,  which  included 
a  part  of  the  period  of  panic,  to  $45,017,960,736  for  the  year 
ending  September  30,  1894.  The  failures  throughout  the 
country  increased  from  10,270,  with  liabilities  of  $108,500,- 
ooo,  in  1892,  to  15,560,  with  liabilities  of  $402,400,000,  in 
1894. 

The  shrinkage  in  money  values  was  as  marked  as  in  the 
volume  of  exchanges.  Securities  which  had  been  considered 
the  safest  ceased  to  pay  dividends  and  fell  rapidly  in  value 
in  the  hands  of  the  holders.  The  Erie,  the  Philadelphia  and 
Reading,  the  Atchison,  Topeka  and  Santa  Fe,  and  the  Union 
Pacific  were  among  the  great  railway  sj^stems,  representing 
hundreds  of  millions  of  obligations,  which  passed  into  the 
hands  of  receivers.  Railway  earnings  fell  $147,390,077  dur- 
ing the  year  ending  June  30,  1894,  as  compared  with  the 
previous  year,  or  12.07  Per  cent,  of  the  gross  earnings. 
Hundreds  of  millions  of  invested  capital  thus  ceased  to  be 
productive,  and  those  who  had  fancied  themselves  in  the 


1  The  surprising  thing  about  this  suspension  of  cash  payments  by 
some  of  the  banks  was  that  little  public  complaint  was  made  about  it. 
The  business  public  seemed  to  recognize  it  as  a  necessary  condition 
of  the  panic,  although  it  is  doubtful  if  it  was  necessary.  Some  of  the 
banks  continued  to  meet  all  demands  for  currency  and  nearly  all  paid 
small  checks.  It  was  estimated  that  $15,000,000  in  currency  was  sold 
in  New  York  during  the  crisis. — Alex.  D.  Noyes,  Political  Science 
Quarterly,  IX.,  29. 


THE   CRISIS  OF  ifyj.  537 

possession  of  an  assured  income  from  their  stock  holdings 
found  their  wealth  turned  to  ashes  in  their  hands.  A  crash 
in  industrial  stocks  took  place  on  May  5,  1893,  Dut  July  26th 
was  one  of  the  panic  days  on  the  stock  exchanges.  Rates 
for  money  in  New  York,  which  were  normal  in  the  morning, 
rose  to  75  per  cent,  per  annum  before  the  close  of  business. 
The  scarcity  of  money  forced  holders  of  securities  to  unload. 
Atchison  general  fours  dropped  from  71  to  66 ;  New  York, 
Lake  Erie,  and  Western  seconds  fell  from  59  to  53  ;  Chicago 
gas  went  down  from  50  to  43^  ;  and  General  Electric 
slumped  from  47^  to  40^.  The  excitement  in  New  York 
was  so  intense  that  it  was  proposed  to  close  the  Stock  Ex- 
change, but  the  proposition  was  rejected  by  the  governors 
at  their  meeting  the  next  day.  An  appeal  was  made  to  the 
foreign  exchange  houses  for  help  and  $10,000,000  in  gold 
was  engaged  in  London  while  exchange  was  quoted  above 
the  exporting  point. 

The  heavy  demands  upon  the  national  banks  and  the  re- 
duction of  their  coin  and  currency  threatened  early  in  the 
panic  to  carry  their  cash  reserves  below  the  limit  required 
by  law  in  the  reserve  cities.  The  reserves  of  the  New  York 
banks  were  close  to  the  limit  early  in  July  and  fell  on 
August  5,  $14,017,800  below  it.  The  natural  remedy  for 
the  scarcity  of  currency  was  the  successful  expedient  of 
other  years  of  panic, — the  issue  of  clearing-house  certifi- 
cates. The  first  issues  w£5=T*rnade  in  Philadelphia  on  June 
1 6th,  but  the  New  York  banks  promptly  followed  on  June 
2ist,  and  those  of  Boston  and  Baltimore  six  days  later. 
The  largest  amount  outstanding  at  one  time  in  New  York 
was  $38,280,000,  from  August  29th  to  September  6th;  in 
Philadelphia,  $10,965,000,  on  August  i5th ;  in  Boston, 
$11,445,000,  from  August  23d  to  September  ist ;  and  in 
Baltimore,  $1,475,000  from  August  24th  to  September  gth. 
These  issues,  amounting  with  $987,000  at  Pittsburg,  to 
$63,152,000,  are  the  only  ones  reported  by  the  Comptroller 
of  the  Currency,  but  they  only  served  as  a  lesson  to  the 
clearing  houses  of  the  country.  Some  form  of  certificate  of 
this  character  was  issued  in  nearly  every  considerable  city 


538          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

and  served  to  greatly  relieve  the  strain  upon  the  ordinary 
circulation. 

A  more  striking  indication  of  the  readiness  of  American 
bankers  and  business  men  to  respond  to  the  necessities  of 
the  moment  was  the  issue  of  emergency  paper  for  general 
circulation.  The  clearing-house  certificates  were  employed 
only  between  the  banks.  The  law  imposing  a  ten  per  cent, 
tax  upon  the  notes  of  State  and  private  banks  was  supposed 
to  stand  across  the  path  of  any  issues  for  general  circulation, 
but  the  law  received  little  attention  when  the  absolute 
necessity  of  a  circulating  medium  forced  itself  upon  the 
country.  Certificates  and  certified  checks  were  issued  in 
scores  of  communities  where  currency  could  not  be  had. 
They  were  usually  guaranteed  by  the  associated  banks 
where  there  were  such  banks  ;  they  were  issued  by  a  single 
bank  in  even  amounts  where  concerted  action  could  not  be 
obtained  ;  and  they  were  issued  by  railway  companies  and 
manufacturers  where  arrangements  could  not  be  made  with 
the  banks.  In  a  few  cases  they  were  issued  with  the  guar- 
antee of  the  local  authorities  drawn  upon  some  public  fund. 
These  certificates  and  checks  proved  very  useful  where  cur- 
rency was  in  demand  for  pay-rolls,  were  treated  as  cash  by 
banks  and  merchants,  and  were  promptly  redeemed  when 
the  panic  was  over.  l 

The  financial  crisis  of  1893  was  a  striking  illustration  of 
the  truth  that  bank-note  circulation  plays  but  a  trifling  part, 
or  none,  in  promoting  crises.  The  national  banks  had  been 


1  Representative  John  DeWitt  Warner  of  New  York,  commenting 
upon  the  relations  of  these  issues  to  the  ten  per  cent,  tax  law,  de- 
clared that  "  In  this  way,  after  the  machinery  so  carefully  adjusted  by 
government  had  utterly  failed  to  work,  the  business  common  sense 
of  our  people  readjusted  its  finances  ;  and  in  every  part  of  the  land 
business  started  up  again,  manufacture  continued,  the  laborer  received 
his  hire,  and  the  merchant  disposed  of  his  goods." — Sound  Currency ', 
Vol.  II.,  No.  6,  p.  8-  These  emergency  issues  were  so  entirely  winked 
at  by  the  government  that  the  collections  under  the  ten  per  cent,  tax 
on  bank  circulation  were  returned  by  the  Commissioner  of  Internal 
Revenue  for  the  year  ending  June  30,  1894,  as  only  two  dollars  and 
twenty-six  cents. 


THE   CRISIS  OF  l8$J.  539 

contracting  their  secured  circulation  until  it  stood  on  June  i, 
1893,  at  only  $177,164,255.  They  had  shared  in  the  expan- 
sion of  business,  however,  by  the  increase  in  their  numbers 
and  in  their  deposits.  The  number  of  national  banks  formed 
in  1890  was  307,  with  an  aggregate  capital  of  $36,250,000. 
The  year  1891  showed  organizations  of  193  new  banks,  with 
capital  of  $20,700,000  ;  1892  showed  organizations  of  163 
banks,  with  capital  of  $15,285,000;  and  1893  na(l  already 
shown  119  new  organizations,  with  capital  of  $11,230,000, 
before  the  process  of  expansion  was  arrested,  with  the  bank- 
ing year  only  two-thirds  complete.  Even  more  remarkable 
was  the  extension  of  banking  on  deposits  instead  of  on  the 
capital  and  surplus  of  the  banks.  Bank  capital  increased 
seventy  per  cent,  from  1870  to  1892,  and  the  number  of 
banks  more  than  doubled,  but  individual  deposits  were 
multiplied  three  and  one  half  times  and  rose  from  one-third 
of  total  liabilities  in  1870  to  more  than  one-half  in  1892. 

One  of  the  defects  of  the  operation  of  the  national  banking 
law,  revealed  anew  by  the  crisis,  was  the  use  made  of  the  pro- 
visions permitting  the  deposit  in  reserve  cities  of  three- fifths 
of  the  cash  reserve  of  the  country  banks  and  permitting  the 
reserve  banks  to  pay  interest  on  such  deposits.  The  national 
banks  of  the  country  on  May  4,  1893,  showed  $174,312,- 
119  as  due  from  reserve  agents,  $121,673,794  due  from 
national  banks,  and  $32,681,708  due  from  State  banks. 
Many  banks  throughout  the  West  were  obliged  to  suspend, 
because  their  reserves  were  not  within  ready  reach.  Out 
of  a  total  of  one  hundred  and  fifty-eight  national  banks 
which  were  forced  to  suspend  payments  during  the  year 
ending  October  31,  1893,  eighty-six  were  authorized  to  re- 
sume business  within  a  short  time,  and  not  one  of  these  was 
east  of  the  Ohio  or  north  of  the  Potomac.  This  is  the  best 
proof  that  these  Western  and  Southern  banks  would  have 
been  able  to  maintain  their  solvency  if  their  cash  reserve 
had  been  in  their  own  custody.  l  It  was  also  a  subject  of 


1  This  argument  is  intelligently  worked  out  by  Mr.  Alexander  D. 
Noyes,   "The  Banks  and  the  Panic  of  1893,"  in  Political  Science 


540          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

criticism  that  the  banks  were  forbidden  to  make  new  loans 
when  their  cash  reserves  fell  below  the  fixed  legal  limits. 
The  Comptroller  was  authorized  to  require  a  bank  to  make 
good  its  reserve,  and  failing  this  to  appoint  a  receiver.  This 
power  was  used  with  moderation  by  Comptroller  Bckels  and 
the  banks  of  the  reserve  cities  increased  their  liquid  resources 
by  their  issues  of  clearing-house  certificates.1 

The  meeting  of  Congress  on  August  yth  found  the  Eastern 
members  of  both  political  parties  so  strongly  impressed  with 
the  serious  condition  of  the  country  that  the}*  were  prepared 
to  push  the  repeal  of  the  silver  purchase  law  by  the  most 
drastic  measures  and  by  a  union  of  forces  without  regard  to 
political  divisions.  The  message  of  President  Cleveland, 
transmitted  to  Congress  on  the  day  following  their  meeting, 
recommended,  ' '  the  prompt  repeal  of  the  provisions  of  the 
Act  passed  July  14,  1890,  authorizing  the  purchase  of  silver 
bullion,  and  that  other  legislative  action  may  put  beyond  all 
doubt  or  mistake  the  intention  and  the  ability  of  the  govern- 
ment to  fulfil  its  pecuniary  obligations  in  money  universally 
recognized  by  all  civilized  countries. ' '  An  agreement  was 
reached  on  August  loth,  between  the  supporters  and  oppo- 
nents of  the  President,  that  debate  should  begin  the  next  day 
and  that  the  vote  on  a  repealing  bill  should  be  taken  on 
August  28th.  Mr.  Wilson  of  West  Virginia,  the  recognized 
leader  of  the  Democratic  majority  of  the  House,  introduced 
a  repealing  bill  early  the  next  morning.  The  silver  men, 
in  accordance  with  their  pledges  to  their  opponents,  made 
no  attempt  to  interpose  dilatory  tactics  and  the  roll  was 
called  on  the  passage  of  the  bill  on  the  28th  of  August. 

The  votes  given  upon  this  day  showed  the  largest  ma- 
jority against  the  silver  standard  given  for  many  years  in 
the  House  of  Representatives.  The  first  vote  was  taken 
upon  a  motion  of  Representative  Bland  of  Missouri,  for  the 
opening  of  the  mints  of  the  United  States  to  the  free  coinage 

Quarterly,  IX.,  12.     It  is  not  to  be  inferred  that  deposits  in  reserve 
cities  should  be  cut  off  entirely,  but  simply  that  they  should  be  con- 
fined within  more  prudent  limits. 
1  Report  on  the  Finances,  1893,  356. 


THE   CRISIS  OF  ifyj.  541 

of  silver  at  the  ratio  of  sixteen  to  one.  The  vote  was  125  in 
the  affirmative  and  226  in  the  negative, — a  majority  of  101 
against  the  proposition.  The  intense  interest  taken  in  the 
issue  and  the  demand  from  the  country  that  every  member 
should  be  accounted  for  is  indicated  by  the  size  of  the  vote, 
which  included  every  living  member  of  the  House  except 
two, — a  sick  member  from  New  York  who  was  paired  in 
favor  of  repeal  with  a  South  Carolina  silver  member.  The 
next  vote  was  taken  upon  free  coinage  at  the  ratio  of  seven- 
teen to  one,  which  was  rejected,  101  to  241.  Free  coinage 
at  the  ratio  of  eighteen  to  one  was  rejected,  103  to  240  ;  free 
coinage  at  the  ratio  of  nineteen  to  one  was  rejected,  104  to 
238  ;  free  coinage  at  the  ratio  of  twenty  to  one  was  rejected, 
122  to  222.  The  next  motion  of  Mr.  Eland's  was  to  revive 
the  Act  of  February  28,  1878,  requiring  the  monthly  pur- 
chase of  not  less  than  $2, 000,000  worth  of  silver  bullion  and 
its  coinage  into  standard  silver  dollars.  The  silver  men 
rallied  their  greatest  strength  upon  this  proposition,  which 
they  represented  as  a  compromise,  but  Mr.  Eland's  motion 
was  rejected,  136  to  213.  The  roll  was  then  called  upon  the 
repealing  bill  of  Mr.  Wilson  and  it  was  passed,  239  to  109, — 
a  clear  majority  of  130  votes.  The  affirmative  vote  was  cast 
by  138  Democrats  and  101  Republicans  ;  the  negative  vote 
was  cast  by  73  Democrats,  25  Republicans,  and  1 1  Populists 
and  Independents. 

The  indications  of  favorable  action  in  the  Senate,  where 
the  supporters  of  silver  were  strongest,  were  greatly  strength- 
ened when  the  Committee  on  Finance  voted,  on  August  i8th, 
to  report  a  repealing  bill,  similar  in  its  effects  to  the  bill 
which  was  before  the  House,  but  containing  some  declara- 
tory matter  in  favor  of  maintaining  the  parity  of  gold  and 
silver.  A  careful  canvass,  during  the  progress  of  the  debate, 
revealed  the  conversion  to  the  repeal  side  of  enough  admin- 
istration Democrats  and  moderate  Republicans  to  make  a 
majority  of  eleven  for  repeal.  The  existence  of  this  ma- 
jority seemed  for  a  time,  however,  to  be  of  little  avail 
against  the  cumbersome  rules  of  the  Senate.  The  silver 
Senators,  by  persistent  dilatory  tactics,  brought  the  Senate 


542          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

at  least  twice  close  to  the  verge  of  surrender  to  their  wishes. 
The  last  and .  most  serious  occasion  was  after  the  failure  of 
the  attempt  to  tire  out  the  silver  leaders  by  a  night  session. 
The  Senate  went  into  continuous  session  on  the  evening  of 
October  nth,  but  the  Populist  Senator,  Allen  of  Nebraska, 
held  the  floor  continuously  for  fifteen  hours,  and  the  attempt 
to  maintain  a  quorum  of  repeal  members  broke  down  at  half- 
past  one  o'clock  on  the  morning  of  October  i3th.  Senator 
Gorman  of  Maryland,  who  had  never  expressed  any  confi- 
dence of  getting  a  vote  on  repeal,  was  one  of  the  promoters 
of  the  compromise  then  proposed,  and  every  Democratic 
Senator  but  four  signed  an  agreement  to  support  it.  The 
President  refused  to  countenance  compromise  in  a  statement 
given  out  on  Sunday  night,  October  22d,  and  the  renewed 
firmness  of  the  friends  of  repeal  forced  the  silver  men  three 
days  later  to  lay  down  their  arms  and  admit  that  they  could 
not  postpone  indefinitely  a  vote  on  the  bill.  The  repeal  bill 
passed  the  Senate  on  October  3oth,  by  a  vote  of  43  to  32,  with 
five  pairs  ;  two  days  later,  on  November  ist,  the  Senate 
amendments  to  the  form  of  the  bill  were  concurred  in  by  the 
House,  and  the  bill  was  approved  by  the  President.1 

The  acute  stage  of  the  crisis  was  over  before  the  approval 
of  the  silver  repeal  bill  by  the  President,  but  the  expected 
revival  of  activity  did  not  follow  on  the  heels  of  repeal. 
Confidence  in  American  credit  abroad  had  been  too  severely 
shaken  and  the  unfavorable  conditions  created  by  the  Sher- 
man law  were  still  felt  with  too  much  force  for  business  to 
resume  at  once  its  wonted  activity.  The  histor)*  of  former 
financial  crises  was  repeated  in  the  accumulation  of  idle 
capital  in  the  banks  in  the  form  of  deposits,  the  swelling  of 
the  cash  reserves,  and  the  reduction  of  commercial  loans. 


1  The  writer  by  a  rather  curious  coincidence,  predicted  in  the 
Journal  of  Commerce  and  Commercial  Bulletin  on  July  6th,  and  in  the 
Springfield  Republican  on  July  10,  1893,  the  exact  date  on  which  the 
repeal  bill  would  become  law.  "The  Sherman  law  cannot  be  re- 
pealed before  November  ist,"  was  the  language  used  in  the  Repub- 
lican, and  the  course  of  events  under  the  rules  of  the  two  houses 
of  Congress  was  outlined  almost  exactly  as  they  afterwards  occurred. 


THE   CRISIS  OF  1893. 


543 


The  following  table  shows  the  state  of  the  loans,  the  specie 
reserve,  and  the  individual  deposits  of  the  national  banks  at 
various  dates  before  the  crisis  and  during  the  period  of  de- 
pression which  followed,  according  to  the  reports  to  the 
Comptroller  of  the  Currency  : 


DATE. 

LOANS  AND  DIS- 
COUNTS.        ^ 

SPECIE  RESERVE. 

INDIVIDUAL 
DEPOSITS.        y 

May  4,  1893 

$2,l6l,40I,858 

$207,222,141 

$1,749,930,817 

July  12,  1893 

2,020,483,671 

l86,76l,I73 

,556,761,230 

October  3,  1893 

,843,634,167 

224,703,860 

,451,124,330 

December  19,  1893 

,871,574,769 

251,253,648 

,539,399,795 

February  28,  1894 

,872,402,605 

256,166,585 

,586,800,444 

May  4,  1894 

,926,686,824 

259,941,923 

,670,958,769 

July  18,  1894 

,944,441,315 

-25O,67O,652 

,677,801,200 

October  2,  1894 

,007,122,19! 

237,250,eS4 

,728,418,819 

December  19,  1894 

,191,913,123 

218,041,222 

,695,489,346 

March  5,  1895 

,965,375,368 

220,931,641 

,667,843,286 

May  7,  1895 

,989,411,20! 

-     218,646,599 

,690,961,299 

July  ii,  1895 

2,016,639,535 

214,427,194 

,736,022,006 

September  28,  1895 

2,059,408,402 

-        196,237,311 

,701,653,521 

These  figures  show  the  gradual  reduction  and  slow  re- 
covery of  the  loans  and  discounts,  which  afford  the  best 
measure  of  business  activity.  The  individual  deposits 
suffered  at  first,  but  began  to  recover,  as  timid  capital  was 
withdrawn  from  active  investment.  The  accumulations  of 
idle  capital  were  largest  in  New  York  and  other  cities  of  the 
East,  because  less  capital  had  been  destroyed  there  by  bad 
investments  and  less  was  needed  to  support  consumption 
which  was  no  longer  supplied  by  current  earnings.  The 
partial  restoration  of  confidence  in  the  banks,  unaccompanied 
by  sufficient  general  confidence  to  promote  new  business 
enterprises,  transformed  the  scarcity  of  currency  which  pre- 
vailed at  the  acute  state  of  the  panic  into  plethora,  which 
there  was  no  means  of  relieving  except  by  the  export  of 
gold.  Gold  for  export  had  been  furnished  up  to  1892  by 
the  banks  of  New  York  city,  and  the  banks  and  the  govern- 
ment mutually  paid  gold  and  gold  certificates  in  the  settle- 
ment of  their  balances  at  the  New  York  Clearing  House. 
The  settlement  of  these  balances  in  gold  was  practically  sus- 


544          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

pended  by  the  Treasury  in  the  summer  of  1892.  The  banks 
were  obliged  to  withhold  gold  from  their  customers  for  the 
payment  of  custom  duties  and  to  send  them  to  the  Treasury 
for  gold  for  export. 

The  combined  effects  of  the  loss  of  gold  income,  the 
reduction  of  receipts,  the  plethora  of  government  paper 
currency,  and  the  continued  withdrawal  of  foreign  capital 
was  to  compel  four  issues  of  bonds,  aggregating  $262,315,- 
400  in  principal  and  $293,000,000  in  net  proceeds  to  the 
Treasury,  during  1894,  1895,  and  1896.  The  most  potent 
cause  of  these  losses  was  the  withdrawal  of  foreign  capital, 
but  this  withdrawal  was  itself  stimulated  by  the  accumula- 
tion of  idle  currency,  and  the  distrust  of  the  financial  policy 
of  the  United  States  which  was  invoked  by  the  reduction 
of  the  gold  reserve.  The  operation  of  the  legal  tender 
currency  and  of  the  Act  of  1878,  forbidding  its  cancellation 
when  redeemed,  was  to  expose  the  Treasury  to  persistent 
raids  for  gold,  against  which  it  had  no  means  of  protection 
through  the  interest  rate,  the  charging  of  a  premium,  or  the 
control  of  the  foreign  exchanges.  The  very  gold  paid  into 
the  Treasury  for  bonds  sold  to  replenish  the  reserve,  was 
obtained  in  large  measure  by  the  presentation  of  legal  tender 
notes  at  the  New  York  sub-Treasury  for  redemption. 

The  bids  for  the  first  issue  of  $50,000,000  in  five  per  cent, 
ten  year  bonds  were  opened  on  February  i,  1894,  and  the 
reserve  was  raised  on  February  28th,  to  $106,527,068.  Gold 
exports  from  the  United  States  set  in  heavily  again  in  April, 
1894,  and  were  not  arrested  until  the  beginning  of  the  out- 
ward movement  of  the  crops  in  August.  The  net  exports 
of  gold  from  the  United  States,  after  deducting  imports, 
were  $9,402,110  in  April,  $23,124,058  in  May,  $22,376,872 
in  June,  $12,823,572  in  July,  and  $1,935,303  in  August,  1894, 
when  the  tide  turned  slightly  in  the  other  direction.  The 
respite  was  but  a  short  one  and  bids  for  another  block  of 
$50,000,000  in  five  per  cent,  ten  year  bonds  were  opened 
November  24,  1894.'  The  reserve  was  restored  from  $58,- 

1  The  net  proceeds  of  the  first  loan  were  158,660,917,  and  of  the 
second  $58,538,500. — Finance  Report,  1894, 


THE   CRISIS  OF  ifyj.  545 

S75.31?  on  September  29th,  to  $106,821,428  on  December 
loth  ;  but  the  demand  for  the  redemption  of  notes  in  gold 
during  the  next  two  months  surpassed  all  previous  experience 
and  carried  the  reserve  down  to  $44,705,967  on  January  31, 
1895.  The  redemptions  of  November  were  $7,799,747  and 
those  of  December  $31,907,221.  There  was  a  slackening 
of  the  pressure  during  the  early  days  of  January,  but  it  set 
in  again  with  renewed  violence  during  the  last  ten  days  of 
the  month  and  drove  the  Treasury  to  the  verge  of  the  sus- 
pension of  gold  payments.  The  single  day  of  January  25, 
1895,  showed  redemptions  of  $7,156,046,  and  the  evening  of 
Saturday,  February  2d,  arrived  with  only  $9,700,000  in  gold 
coin  available  in  the  New  York  sub-Treasury.  Even  this 
was  obtained  by  trenching  upon  the  fund  held  for  the  re- 
demption of  gold  certificates.  Panic  was  seizing  the  busi- 
ness community  and  a  single  New  York  bank  reported  to 
Assistant  Secretary  Curtis  that  on  January  3oth  they  received 
over  one  hundred  and  fifty  requests  for  gold  coin,  most  of  it 
evidently  for  hoarding. ' 

President  Cleveland  recommended  the  retirement  of  the 
legal  tender  notes  and  the  substitution  of  a  banking  currency 
in  his  annual  message  to  Congress  in  December,  but  the 
House  of  Representatives  on  January  9,  1895,  refused  to 
consider  the  bill  reported  in  pursuance  of  this  recommenda- 
tion. The  President  on  January  28th  sent  a  special  message 
to  Congress,  asking  that  he  be  given  authority  to  retire  the 
greenbacks  and  to  issue  bonds  under  more  favorable  condi- 
tions than  those  authorized  by  existing  law.  A  bill  to  carry 
out  his  recommendations  was  introduced  by  Chairman 

1  Distrust  of  the  security  of  United  States  notes  or  the  pressure  of 
the  excessive  paper  currency  produced  a  very  different  attitude  on  the 
part  of  the  public  towards  the  gold  reserve  after  the  passage  of  the 
Sherman  law  from  that  which  prevailed  before.  The  paper  money 
presented  to  the  Treasury  for  redemption  in  gold  was  $7,976,698  during 
the  fiscal  year  1879,  the  first  six  months  after  resumption,  and  declined 
in  1882  as  low  as  $4o,cxx>.  The  largest  redemptions  between  1879  and 
1891  were  $6,863,699  in  1886.  The  redemptions  in  1891  were  $5,986,- 
070  ;  in  1892,  $9,125,842  ;  in  1893,  $102,100,345  ;  in  1894,  $84,802,150; 
in  1895,  $117,354,178;  and  in  1896,  $158,655,956. 


546          HIS  TOR  Y  OF  MODERN  BANKS  OF  ISSUE. 

Springer  of  the  Banking  Committee  and  reported  by  him  to 
the  House  two  days  later.  The  bill  authorized  the  issue  of 
three  per  cent,  bonds,  redeemable  after  ten  days  at  the 
pleasure  of  the  government ;  the  cancellation  of  the  green- 
backs received  in  payment  for  the  bonds,  to  the  amount  of 
new  circulation  issued ;  and  the  increase  of  national  bank 
circulation  to  the  par  value  of  bonds  deposited  as  security. 
This  bill  was  defeated,  on  January  yth,  by  a  vote  of  135  to 
162. 

The  eighth  day  of  February,  1895,  was  marked  by  the 
delivery  to  Congress  of  a  special  message  from  President 
Cleveland,  describing  one  of  the  most  notable  transactions 
of  modern  finance.  The  President  announced  the  comple- 
tion of  a  contract  for  the  purchase  by  the  government  of 
3,500,000  ounces  of  standard  gold  coin,  by  the  delivery  of 
about  $62,400,000  in  four  per  cent,  coin  bonds,  redeemable 
after  thirty  years.1  The  purchasers  of  the  bonds  were 
Messrs.  August  Belmont  and  Co. ,  on  behalf  of  themselves, 
and  Messrs.  N.  M.  Rothschild  and  Sons,  of  I^ondon,  and 
Messrs.  J.  P.  Morgan  and  Co.,  on  behalf  of  themselves  and 
Messrs.  J.  S.  Morgan  and  Co.  of  L,ondon.  The  contract  was 
witnessed  by  Assistant  Secretary  William  E.  Curtis,  who 
had  much  to  do  with  bringing  it  to  a  successful  completion, 
and  by  Mr.  Francis  Lynde  Stetson  of  New  York.  There 
was  an  alternative  clause,  reserving  to  the  Secretary  of  the 
Treasury  the  right,  in  case  he  should  receive  authority  from 
Congress  within  ten  days,  to  substitute  three  per  cent,  bonds 
specifically  payable  in  gold  coin  for  the  coin  bonds  author- 
ized by  existing  law.  The  effect  of  this  substitution,  if  the 
gold  bonds  were  accepted  at  par,  as  the  contract  provided, 
would  have  been,  according  to  the  message  of  the  President, 
to  save  the  United  States  in  interest  charges  $539,159  per 
year,  or  $16, 174,770  during  the  thirty  years  fixed  as  the  term 
of  the  bonds.  A  bill  to  authorize  this  substitution  of  gold 
bonds  was  reported  by  Chairman  Wilson  of  the  Ways  and 

1  The  actual  transactions  under  the  contract  were  the  delivery  of 
165,116,2.44  in  gold  for  $62,315, 400  in  bonds. — Finance  Report,  1895, 

IvVI. 


THE   CRISIS  OF  ifyj.  547 

Means  Committee  of  the  House  on  February  13,  1895,  but 
was  defeated  in  the  House  the  next  day  by  a  vote  of  120  to 
167,  and  the  contract  was  left  in  force  according  to  its 
original  terms. 

The  peculiar  feature  of  this  contract  for  the  exchange  of 
bonds  for  gold  lay  in  the  provision  that  the  purchasers  of  the 
bonds,  ' '  as  far  as  lies  in  their  power,  will  exert  all  financial 
influence  and  will  make  all  legitimate  efforts  to  protect  the 
Treasury  of  the  United  States  against  the  withdrawal  of 
gold  pending  the  complete  performance  of  this  contract. ' ' 
The  fulfilment  of  this  pledge  was  accomplished  through  the 
control  over  the  foreign  exchanges  which  was  exercised  by 
the  firms  which  purchased  the  bonds.  They  brought  into 
their  syndicate  the  leading  gold  shipping  houses,  and  for- 
eign bills  of  exchange  were  placed  upon  the  market  for 
several  months  in  just  sufficient  quantities  to  meet  the  cur- 
rent demand.  •  The  syndicate  by  this  process  created  debts 
in  Europe  which  it  was  necessary  to  cover  at  some  time  by 
the  purchase  of  exchange  or  the  shipment  of  gold.  They 
guarded  in  a  measure  against  possible  losses  by  keeping  the 
rate  for  the  bills  which  they  sold  considerably  above  the 
gold  shipping  point.  They  thus,  in  effect,  created  a  corner 
in  foreign  exchange  and  imposed  the  cost  of  their  operations 
upon  the  purchasers  of  foreign  bills.  This  method  of  con- 
trolling exchange  operated  with  wonderful  success  all 
through  the  spring  and  up  to  the  closing  days  of  July.  The 
tide  of  gold  exports,  which  rose  to  $24,698,489  in  the  month 
of 'January,  was  turned  into  net  imports  by  the  operations 
of  the  syndicate  in  bringing  gold  from  Europe.  February 
showed  net  imports  of  $4,067,003  ;  March,  net  imports  of 
$4,120,290;  April,  net  imports  of  $2,029,761  ;  May,  net  im- 
of  $3,271,193  ;  and  June,  net  imports  of  $1,963,750.  The 
effect  upon  the  treasury  was  equally  striking.  The  redemp- 
tions of  United  States  legal  tender  notes  in  gold,  which  had 
been  $45,117,738  in  January,  were  reduced  to  $5,560,952  in 
February,  $1,089,085  in  March,  $1,017,571  in  April,  $1,166,- 
472  in  May,  and  $1,239,287  in  June. 

The  essential  purpose  of  the  contract,  in  spite  of  criticisms 


548          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

to  which  it  was  justly  subject,  was  to  afford  a  breathing 
spell  to  the  country  for  the  restoration  of  confidence  in  the 
monetary  standard  and  in  the  business  future.  The  period 
of  business  depression  beginning  in  1893  had  lasted  long 
enough  to  exhaust  idle  stocks  of  goods,  to  accumulate  capi- 
tal in  the  banks,  and  to  prepare  the  business  community  for 
a  new  period  of  activity  if  confidence  could  be  restored.  Mr. 
J.  Pierpont  Morgan,  the  eminent  financier  who  was  the 
leading  spirit  in  the  arrangement,  would  probably  have  made 
no  attempt  to  restore  confidence  and  business  activity  by 
similar  methods  in  the  spring  of  1893  or  of  1894,  but  he 
counted  upon  the  probabilities  of  success  in  such  an  under- 
taking in  1895,  an(i  events  partially  justified  his  judgment. 
The  loans  and  discounts  of  the  national  banks  of  the  City 
of  New  York  increased  from  $332,069,999  on  March  5,  1895, 
to  $363,848,573  on  September  28,  1895,  while  the  loans  and 
discounts  of  all  the  national  banks  of  the  country  advanced 
in  the  same  interval  from  $1,965,375,368  to  $2,059,408,402. 
The  imports  for  the  calendar  year  1895  were  $801,663,490, 
an  increase  of  $125,000,000  over  1894,  and  only  $39,000,000 
less  than  in  the  prosperous  year  1892.  Receipts  for  postage, 
an  unfailing  index  of  business  conditions,  increased  in  every 
quarter  of  1895  over  tne  corresponding  quarter  of  1894,  and 
reached  for  the  concluding  quarter  of  the  year  a  total  of 
$20,517,014,  the  largest  volume  of  business  ever  recorded. 

The  essential  defects  of  the  policy  of  the  syndicate  con- 
tract were  its  failure  to  diminish  the  redundant  volume  of 
currency,  the  stimulus  thus  afforded  to  imports  over  exports, 
and  the  artificial  nature  of  the  attempt  to  corner  the  exchange 
market.  This  attempt  practically  broke  down  towards  the 
close  of  July.  A  leading  coffee  firm  which  had  payments 
to  make  in  Europe  found  that  they  could  be  made  cheaper 
by  the  shipment  of  gold  drawn  from  the  Treasury  than  by 
the  purchase  of  exchange  at  the  rates  fixed  by  the  syndi- 
cate. One  of  the  syndicate  firms  was  also  compelled  to  ship 
gold  withdrawn  from  the  Treasury,  in  order  to  cover  the  bills 
of  exchange  which  they  had  sold.  The  syndicate  had  been 
released  from  a  part  of  the  obligation  to  bring  half  the  gold 


THE   CRISIS  OF  1 893.  549 

in  payment  for  the  bonds  from  abroad,  and  had  completed 
their  deliveries  under  the  contract  on  June  24,  1895.  Mem- 
bers of  the  syndicate  still  held  considerable  quantities  of 
gold,  and  the  first  exports  were  made  up  by  voluntary 
deposits  of  this  gold  in  the  Treasury,  amounting  up  to 
September  n,  1895,  to  $l6>127>432-  These  deposits  several 
times  restored  the  reserve  to  $100,000,000,  when  it  was  on 
the  point  of  falling  below  that  amount,  but  the  reserve 
slowly  travelled  downward  from  $107,512,362  at  the  end  of 
June  to  $92,943,179  at  the  end  of  October. 

The  loss  of  control  over  the  exchange  market  practically 
terminated  the  efforts  of  the  syndicate  to  maintain  the  re- 
serve, in  spite  of  their  voluntary  gold  deposits.  The  gold 
obtained  for  shipment  continued  to  be  drawn  almost  ex- 
clusively from  the  Treasury,  the  net  exports  were  $13,468,- 
188  in  November  and  $14,170,899  in  December,  and  the  gold 
reserve  fell  to  $63,262,268  on  December  31,  1895.  President 
Cleveland  in  the  meantime  delivered  to  Congress  on  Decem- 
ber 3d,  his  annual  message,  laying  special  stress  upon  the 
importance  of  retiring,  by  means  of  a  bond  issue,  the  legal 
tender  notes,  which  were  presented  over  and  over  again  to 
the  Treasury  for  redemption  and  were  required  by  the  Act  of 
May  31,  1878,  to  be  "  re-issued  and  paid  out  again  and  kept 
in  circulation."  Congress  gave  no  indication  of  compliance 
with  this  recommendation,  and  the  raid  upon  the  gold  re- 
serve increased  in  intensity  after  the  delivery  of  the  special 
message  of  the  President  upon  the  encroachments  of  Great 
Britain  upon  the  Venezuelan  boundary.  The  possibility  of 
war  between  Great  Britain  and  the  United  States  led  Eng- 
lish investors  to  unload  American  securities,  caused  large 
withdrawals  of  gold  from  the  Treasury  for  export,  and 
brought  the  country  to  the  verge  of  the  suspension  of  gold 
payments.  The  President,  on  December  2oth,  called  the 
attention  of  Congress  in  a  special  message  to  the  serious 
financial  condition  of  the  country  and  urged  that  they  should 
not  take  a  recess  for  the  holidays  without  taking  some  step 
for  the  protection  of  the  public  credit.  An  eifort  was  made 
by  Congress  to  pass  some  legislation,  but  it  was  not  satis- 


550          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

factory  at  any  time  to  the  administration,  because  provision 
was  not  made  for  the  issue  of  bonds  specifically  payable  in 
gold  nor  for  the  retirement  of  legal  tender  notes.  It  soon 
appeared  that  the  Senate  and  House  could  not  agree  upon 
any  measure  between  themselves,  and  the  President  and 
Secretary  of  the  Treasury  determined  upon  another  issue  of 
bonds  under  the  existing  law. 

A  public  call  for  subscriptions  to  $100,000,000  of  four  per 
cent,  coin  bonds,  dated  February  i,  1895,  and  payable  at  the 
pleasure  of  the  United  States  after  thirty  years,  was  issued 
by  Secretary  Carlisle  on  January  5,  1896.  There  was  some 
doubt  at  first  among  financiers  whether  the  subscriptions 
from  responsible  holders  of  gold  would  be  sufficient  to  per- 
manently restore  the  gold  reserve.  Mr.  J.  Pierpont  Morgan 
had  been  organizing  a  syndicate,  in  the  hope  of  making  a 
contract  with  the  government  similar  to  that  of  1895,  an<^  the 
fact  that  he  intended  to  obtain  gold  for  the  execution  of  his 
part  of  the  contract  from  outside  the  Treasury  gave  the  plan, 
in  the  opinion  of  many  financiers,  an  advantage  over  a  popu- 
lar loan.  The  response  to  the  call  of  Secretary  Carlisle, 
however,  when  the  bids  were  opened  on  February  5th,  was 
such  as  to  dissipate  such  fears  and  to  materially  strengthen 
the  public  credit.  The  number  of  subscriptions  of  an  appar- 
ently bona  fide  character  was  four  thousand  six  hundred  and 
forty,  and  the  amount  was  $568, 269, 850.  A  syndicate  headed 
by  Mr.  Morgan  subscribed  for  the  entire  amount  at  110.6877. 
It  was  found  that  there  were  subscriptions  for  $66,788,650  at 
higher  figures,  so  that  Mr.  Morgan's  syndicate  were  allotted 
only  the  remainder  of  the  $100,000,000.  Subsequent  defaults 
on  the  part  of  some  of  the  subscribers  raised  Mr.  Morgan's 
allotment  to  about  $38,000,000  and  made  the  net  proceeds 
of  the  loan  about  $111,250,000.  The  gold  reserve  of  the 
Treasury  was  rapidly  increased  by  the  deposit  of  gold  in 
payment  for  the  bonds  and  rose  on  March  17,  1896,  to  $127,- 
862,644.  The  loan  appeared  to  afford  some  of  the  advan- 
tages in  restoring  business  confidence  afforded  by  the 
syndicate  contract  of  1895.  Business  showed  increased 
activity,  and  net  exports  of  gold  fell  off  until  revived  by  agi- 


THE   CRISIS  OF  1 893.  551 

tation  regarding  the  maintenance  of  the  metallic  standard. 
This  outward  movement  was  checked  by  the  banks  and  ex- 
change houses  and  the  reserve  again  increased  during  the 
autumn  of  1896.  / 

The  crisis  in  Australia  in  1893  was  one  of  those  peculiar 
to  new  countries.  The  future  had  been  too  rapidly  dis-  l/ 
counted,  speculation  in  land  had  been  'carried  beyond  the 
possibility  of  the  immediate  development  of  the  country 
and  an  enormous  debt  had  been  created  for  public  works. 
Competition  in  banking  had  been  carried  to  such  an  extreme 
that  nearly  every  little  community  supported  branches  of 
all  the  leading  banks,  and  obtained  excessive  loans  on  prop- 
erty which  could  not  be  converted  into  quick  assets.  Not 
content  with  loaning  their  own  funds  in  this  way,  the  Aus- 
tralian banks  established  agencies  all  over  the  United  King- 
dom, with  some  local  solicitor  or  stock  broker  as  agent,  and 
paid  commissions  to  obtain  deposits.  When  the  crisis  broke 
out  in  January  1893,  the  British  deposits  in  the  Australian 
banks  were  about  one-third  of  the  total  deposits  of  ^153,- 
000,000.  Foreign  money  had  poured  into  Australia  under 
the  conviction  among  British  investors  that  investments 
among  those  of  their  own  blood  were  safer  than  among  the 
South  American  republics  or  the  decrepit  nations  of  Eastern 
and  Southern  Europe. 

This  easy  accession  of  riches  came  to  be  counted  by  the 
Australians  as  part  and  parcel  of  their  own  accumulations. 
A  circular  issued  on  behalf  of  a  public  loan  for  the  colony 
of  Victoria  in  1892  counted  up  the  wealth  of  the  people  at 
^440,000,000  or  at  the  rate  of  nearly  ^"400  for  each  of  the 
1,140,000  inhabitants.  This  valuation  was  more  than  fifty 
per  cent,  greater  per  capita  than  that  of  Great  Britain,  after 
centuries  of  accumulation,  but  it  was  made  up  by  appraising 
unsettled  lands  at  £2  per  acre  which  could  not  be  sold  to- 
day for  £i  and  by  a  similar  process  of  inflation  of  bank 
credits  and  personal  wealth.1  The  City  of  Melbourne,  with 
its  population  of  500,000,  was  extended  on  the  maps  of  the 
land  speculators  to  limits  which  would  have  afforded  ample 


1  Raffalovich,  Le  Marche  Financier  en  1893-94,  305. 


552  HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

accommodations  for  a  city  with  twice  the  population  of 
I/mdon.  The  feeling  of  affluence  which  such  figures  caused 
had  encouraged  the  creation  of  a  public  debt  of  about  ^34  per 
head,  almost  exactly  twice  the  enormous  public  debt  of  the 
United  Kingdom. 

Stubborn  facts  did  not  bear  out  these  inflated  valuations 
and  the  adoption  of  the  protective  policy  in  a  country  where 
manufacturing  had  hardly  been  born  added  to  the  fetters 
upon  consumption,  whatever  might  be  expected  from  its 
final  results  in  developing  native  industries.  The  revision 
of  the  tariff  in  1892  was  made  with  the  avowed  purpose  of 
obtaining  additional  revenue  to  meet  the  charges  on  the  for- 
eign debt,  but  its  results  were  to  reduce  the  customs  receipts 
for  the  fiscal  year  1893  by  about  ,£250,000.  Warnings 
against  the  land  boom  were  given  several  years  before 
the  crisis  of  1893,  but  many  of  the  banks  had  plunged  in 
so  deep  and  tied  up  so  large  a  proportion  of  their  assets  in 
landed  security  that  they  dared  not  take  a  backward  step. 
Advances  once  made  on  land  were  increased  in  proportion  to 
the  fictitious  value  reached  by  speculation,  the  discount  on 
the  added  loan  was  deducted  from  the  new  advance  to  the 
borrower,  and  this  actual  increase  in  the  risk  of  the  batik 
was  carried  to  the  fictitious  account  of  earnings  and  profit. l 

A  large  proportion  of  the  British  deposits  which  had  been 
secured  through  agents  were  owned  in  Scotland  and  fell  due 
on  the  half  yearly  term  days.  Every  half  year  represented 
a  critical  point  in  Australian  banking  and  none  looked  more 
critical  as  it  drew  near  than  the  Whitsunday  term  of  1893. 
The  danger  was  so  threatening,  that  some  of  the  banks 
would  be  compelled  to  suspend,  by  demands  from  Scotland, 
that  Australian  depositors  began  to  withdraw  their  accounts 
and  thus  brought  about  the  collapse  which  might  otherwise 
have  been  again  postponed.  The  signal  of  the  actual  crash 
came  on  January  29th,  when  the  Federal  Bank  of  Melbourne 
failed.  It  was  a  new  institution,  with  limited  capital,  long 
looked  upon  with  distrust  by  the  older  banks,  and  a  strong 

1  Sydney  J.  Murray,  London  Bankers'  Magazine,  Oct.,  1895,  LX., 
479- 


THE   CRISIS  OF  7c?pj.  553 

effort  was  made  to  create  the  impression  that  the  failure  had 
simply  cleared  the  air  and  left  the  older  institutions  stronger 
than  before.  The  public  refused  to  accept  this  view  of  the 
case  and  gradually  began  to  withdraw  their  deposits  from  all 
the  banks.  Notices  of  withdrawal  poured  in  from  Great 
Britain,  and  on  April  4th  the  Commercial  Bank  of  Austra- 
lasia closed  its  doors,  with  deposits  of  ^12,044,000.  The 
English  and  Australian  Bank,  with  deposits  of  .£5,795,000 
and  ninety-one  branches,  stopped  payment  on  April  i2th,  and 
the  London  Chartered  Bank,  with  deposits  of  ,£6,588,000 
and  fifty-eight  branches,  closed  its  doors  during  the  next 
week.  The  government  proclaimed  a  five  days'  holiday 
early  in  May,  in  the  hope  that  public  excitement  would  sub- 
side while  the  banks  were  enjoying  a  breathing  spell.  But 
banks  continued  to  go  down,  and  when  the  last  failure  oc- 
curred on  May  iyth,  fourteen  institutions  had  failed  with 
aggregate  deposits  of  ^85,000,000,  including  ^"26,000,000 
owed  in  Great  Britain. 

Twelve  banks,  with  deposits  before  the  panic  of  ^71,000,- 
ooo,  succeeded  in  weathering  the  storm  and  did  much  to  re- 
store confidence  by  their  refusal  to  avail  themselves  of  some 
of  the  devices  of  the  weaker  institutions.  The  government 
of  New  South  Wales  made  bank-notes  a  legal  tender  for  six 
months,  which  enabled  the  banks,  without  increasing  circu- 
lation more  than  ten  per  cent.,  to  come  to  the  relief  of  com- 
merce by  liberal  loans.  The  surplus  of  loanable  capital  in 
Europe  brought  some  relief,  when  the  substantial  character 
of  the  assets  of  the  stronger  banks  become  known,  and  plans 
of  reconstruction  were  soon  set  in  motion.1  There  is  still 
some  apprehension  as  to  the  ability  of  the  banks  to  meet  their 
extended  obligations  at  maturity,  and  the  belief  is  held  by 
careful  observers  of  Australian  affairs  that  the  reduction  of 
competing  branches  of  the  banks  has  not  proceeded  far 
enough.  The  era  of  inflation  has,  however,  been  brought 
to  an  end,  and  the  great  resources  of  Australia  seem  likely 
to  permit  a  gradual  recovery  of  her  real  prosperity,  if  not  of 
the  inflated  values  of  former  times. 

1  London  Bankers'  Magazine,  May,  1895,  LJX.,  715. 


CHAPTER  XXIII. 

THE   ADVANTAGES   OP  A   BANKING    CURRENCY. 

It  is  Created  for  Carrying  on  Business  and  is  Subject  to  Business 
Conditions  —  The  Volume  of  Exchanges  through  the  Banks  and 
Clearing  Houses  —  Superiority  of  Bank-notes  over  Government 
Paper  Money  in  Convenience,  the  Promotion  of  Banking  Facilities, 
and  Stability  —  The  Importance  of  Large  Liquid  Assets  in  Main- 
taining Redemption  on  Demand. 


inherent  advantage  of  a  currency  issued  by  well 
regulated  banks  is  its  adaptation  to  business  needs. 
It  is  the  outgrowth  of  the  relations  of  business  men 
with  each  other  and,  where  its  essential  character  has  not 
been  too  much  modified  by  repressive  laws,  it  represents  the 
evolution  of  the  simplest  and  best  methods  of  making  com- 
mercial exchanges.  Being  the  growth  and  creature  of  busi- 
ness transactions,  its  adaptability  to  them  is  more  nearly 
perfect,  of  necessity,  than  other  systems  originated  for  other 
purposes  and  only  incidentally  shaped  to  accommodate  such 
needs.  It  is  of  prime  importance  that  there  should  be  a 
fixed  metallic  standard  of  value,  just  as  it  is  of  importance 
that  there  should  be  a  fixed  official  length  for  the  meter  or 
yard-stick.  The  standard  being  fixed,  the  duty  of  the  state 
is  done  and  it  should  be  left  for  the  business  community  to 
conduct  its  transactions,  so  long  as  they  are  measured  by  the 
standard,  by  the  means  which  it  finds  most  convenient. 
These  means,  the  business  community  has  decreed,  are 
found  in  the  various  forms  of  commercial  paper.  The  great 
development  of  modern  credit  has  made  bank-notes  only  the 
small  change  in  such  transactions,  but  they  are  of  supreme 
importance  in  giving  credit  birth  where  it  is  unknown  and 

554 


THE  ADVANTAGES  OF  A   BANKING  CURRENCY.      555 

are  still  the  essential  tools  of  the  retail  trade  which  makes 
possible  the  greater  commerce. 

The  essential  advantages  of  a  banking  currency  may  be 
summarized  under  these  heads  : 

1.  Economy  and  convenience  in  making  payments. 

2.  The  adjustment  of  the  volume  of  currency  to  business 
conditions. 

3.  The  promotion  of  banking  facilities  and  of  the  use  of 
instruments  of  credit. 

4.  The  adherence  to  a  fixed  metallic  standard  of  value. 

I.  The  economy  of  payment  by  means  of  paper  credit 
was  understood  in  remote  antiquity,  when  bills  of  exchange 
occasionally  took  the  place  of  physical  transfers  of  silver 
and  gold.  In  more  modern  times,  the  application  of  the 
same  economy  to  domestic  transactions  has  given  birth  to 
checks,  domestic  bills  of  exchange,  bank-notes,  bank  credits, 
and  clearings.  Kvery  such  transaction  which  dispenses 
with  metallic  money,  without  impairing  the  safety  of  the 
standard,  saves  to  the  community  the  capital  which  would 
otherwise  be  employed  in  the  mere  mechanism  of  exchange 
and  releases  it  for  the  active  service  of  production  and  re- 
production. The  economic  effects  of  this  saving  have  been 
set  forth  by  Adam  Smith  in  a  passage  which  has  become 
classic  : ' 

The  gold  and  silver  money  which  circulates  in  any  country,  and  by 
means  of  which  the  produce  of  its  land  and  labor  is  annually  circu- 
lated and  distributed  to  the  proper  consumers,  is,  in  the  same  manner 
as  the  ready  money  of  the  dealer,  all  dead  stock.  It  is  a  very  valu- 
able part  of  the  capital  of  the  country,  which  produces  nothing  to  the 
country.  The  judicious  operations  of  banking,  by  substituting  paper 
in  the  room  of  a  great  part  of  this  gold  and  silver,  enable  the  coun- 
try to  convert  a  great  part  of  this  dead  stock  into  active  and  produc- 
tive stock  ;  into  stock  which  produces  something  to  the  country. 
The  gold  and  silver  money  which  circulates  in  any  country  may  very 
properly  be  compared  to  a  highway,  which,  while  it  circulates  and 
carries  to  market  all  the  grass  and  corn  of  the  country,  produces 
itself  not  a  single  pile  of  either.  The  judicious  operations  of  bank- 
ing, by  providing,  if  I  may  be  allowed  so  violent  a  metaphor,  a  sort 

1  Wealth  of  Nations,  B.  II.,  Ch.  ii.  (L,  321-22). 


556          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

of  wagon-way  through  the  air,  enable  the  country  to  convert,  as  it 
were,  a  great  part  of  its  highways  into  good  pastures  and  corn-fields, 
and  thereby  to  increase  very  considerably  the  annual  produce  of  its 
land  and  labor. 

The  extent  in  our  time  of  this  substitution  of  paper  credit 
for  metallic  money,  without  hampering  the  operations  of 
trade,  is  as  great  a  marvel  in  its  way  as  the  development  of 
the  power  of  steam  or  electricity.  The  volume  of  metallic 
money  has  grown  from  year  to  year,  until  the  amount  in  use 
in  the  world  is  computed  at  over  $8,000,000,000  ; '  but  the 
expansion  in  the  volume  of  money  has  followed  with  but 
halting  steps  the  growth  in  the  volume  of  commercial  trans- 
sactions  and  the  development  of  the  use  of  credit  in  carry- 
ing them  on.  An  estimate  of  the  aggregate  of  the  world's 
transactions  would  be  an  idle  undertaking.  The  most  that 
is  possible  is  a  record  of  the  balances  which  pass  through 
the  banks  and  clearing  houses  of  a  few  commercial  centres. 
The  use  of  circulating  notes  has  become  but  a  small  part  of 
these  great  transactions,  but  still  remains  under  many  con- 
ditions an  important  part.  Banks  now  do  business  largely 
through  the  power  to  grant  credits  on  their  books,  which  is 
derived  from  their  deposits.  The  total  banking  power  of 
the  world,  including  capital  and  deposits,  is  calculated  by 
Mr.  Muhleman,  the  able  Deputy  Assistant  Treasurer  of 

1  The  economy  in  the  substitution  of  paper  money  and  bank-notes 
for  coin  has  become  a  factor  relatively  so  small  in  comparison  with 
the  economy  of  other  forms  of  credit  that  it  is  not  necessary  to  dwell 
upon  it  at  length  ;  but  the  development  of  the  other  forms  of  credit 
is  often  promoted,  as  will  appear  later,  by  the  power  to  issue  bank- 
notes. The  gold  in  use  in  the  world  as  money  in  1895,  according  to 
the  report  of  the  Director  of  the  United  States  Mint,  was  $4,086,800,- 
ooo  and  the  silver,  at  the  coining  value,  was  $4,070,500,000.  The  cost 
of  maintaining  ^95,000,000  in  gold,  silver,  and  copper  in  circulation 
in  Great  Britain  is  estimated  by  Mr.  W.  Stanley  Jevons  at  ,£"2,972,000 
($14,500,000)  annually,  of  which  ^2,850,000  is  for  interest  at  three 
per  cent.  Investigations  in  Currency  and  Finance,  296.  The  cost 
of  maintaining  the  currency  of  the  United  States,  if  the  present  vol- 
ume of  about  $1,600,000,000  were  exclusively  metallic,  would  be 
about  $45,000,000  annually  ;  and  the  annual  cost  of  maintaining  the 
actual  gold  and  silver  circulation  of  the  world  is  about  £240,000,000. 


THE  ADVANTAGES  OF  A   BANKING   CURRENCY.      557 

the  United  States  at  New  York,  at  .£3, 9 15, 000,000,  or  $19,- 
000,000,000,  distributed  as  follows  :  l 


Europe, 
Asia, 
Africa, 
Oceanica, 
North  America, 
South  America, 


^"2,200,000,000 

150,000,000 

50,000,000 

175,000,000 

1,200,000,000 

140,000,000 

,£3,915,000,000 


The  banking  resources  of  the  banks  of  the  United  King- 
dom of  Great  Britain  and  Ireland  alone  are  nearly  ;£i,ooo,- 
000,000,  and  such  resources  attained  in  the  United  States 
in  1895  the  even  greater  total  of  $6, 703, 544, 084."  This  vast 
banking  power,  moreover,  represents  only  partially  the 
capacity  of  the  banks  of  the  world  for  conducting  exchanges. 
The  exchanges  through  the  clearing  houses  in  the  great 
commercial  countries  represent  annually  many  times  their 
capital,  or  circulation,  or  deposits  at  any  fixed  date,  and 
more  than  the  entire  net  earnings  of  the  people.  The  Lon- 
don Clearing  House  was  in  operation  as  early  as  1773,  but 
the  universal  use  of  the  clearing  system  is  a  development  of 
the  last  half  century.  The  private  bankers  retained  exclu- 
sive control  of  the  London  Clearing  House  until  1854,  when 
the  London  and  Westminster  and  other  leading  joint  stock 
banks  were  permitted  to  share  in  its  advantages.3  The  Bank 
of  England  was  not  admitted  until  1864,  and  even  at  thepres- 

1  Monetary  Systems  of  the  World,  160.    This  calculation  is  based 
in  part  upon  an  estimate  of  Mr.  Mulhall,  the  English  statistician,  in 
1889,  but  the  estimate  is  enlarged  to  correspond  to  the  more  recent 
date  and  to  known  omissions  in  his  figures. 

2  For  the  United  Kingdom,  see  p.  135.     The  figures  for  the  United 
States  include  the  aggregate  capital,  surplus,  undivided  profits,  and 
individual  deposits  of  national  banks  on  July  n,  1895,  and  of  State, 
stock  savings,  and  private  banks,  and  loan  and  trust  companies  at 
date  of  latest  report.— Comptroller's  Report,  1895,  512. 

3  Prof.  MacLeod  computes  that  the  admission   of  the  joint  stock 
banks  released  them  from  keeping  ,£"500,000  in  currency  almost  con- 
stantly on  hand,  and  made  that  amount  available  for  general  circula- 
tion.—  Theory  and  Practice  of  Banking,  II.,  183-84. 


558 


HISTORY  OF  MODERN  BANKS  OF  ISSUE. 


ent  time  some  of  the  large  Scotch  banks  do  their  business 
indirectly,  through  the  agency  of  another  bank. 

The  Paris  Clearing  House  is  composed  of  eleven  banking 
houses  and  was  not  organized  on  its  present  basis  until  1872. 
The  Vienna  Clearing  House,  with  a  dozen  leading  banking 
houses  grouped  around  the  Imperial  Bank  of  Austria-Hun- 
gary, was  organized  in  the  same  year,  but  several  of  the 
private  banks  had  adjusted  their  compensations  between 
themselves  as  early  as  1864.  Clearing  houses  were  estab- 
lished in  Italy  by  legal  decree  of  May  19,  1881,  at  Rome, 
Milan,  Geneva,  Bologna,  Florence,  and  Catana.  Cologne 
and  Stuttgart  have  each  possessed  a  clearing  house  since 
1882,  and  one  was  formed  at  Berlin  in  1883,  with  the  Impe- 
rial Bank  as  its  centre.  No  clearing  system  seems  to  have 
existed  in  Germany  prior  to  this  date,  but  the  Imperial 
Bank,  the  Check  Bank  of  Hamburg,  and  several  others, 
practised  the  use  of  transfer  checks  upon  a  large  scale,  and 
clearing  houses  are  now  in  operation  at  Hamburg,  Bremen, 
Leipsic,  Breslau,  and  Dresden.1  The  operations  through 
the  London  Clearing  House  were  ,£954,000,000  in  1839,  and 
^1,900,000,000  in  i857.2  Their  magnitude  in  recent  years 
is  indicated  in  the  following  table  : 


YEAR. 

ON  STOCK  EXCHANGE 
SETTLING  DAYS. 

PER  CENT.  OF 
TOTAL. 

TOTALS  FOR  THE  YEAR. 

1868 

£  523,349,000 

15-3 

^3,425,185,000 

1872 

1,015,959,000 

17.2 

5,916,452,000 

1874 

1,010,456,000 

17.0 

5,936,772,000 

1876 

761,091,000 

15-4 

4,963,48O,OOO 

1878 

795,443,000 

15-9 

4,992,398,000 

1880 

,151,867,000 

19.8 

5,794,238,000 

1882 

,228,916,000 

19.7 

6,221,206,000 

1884 

960,623,000 

16.6 

5,798,555,000 

1886 

,198,557,000 

20.3 

5,901,925,000 

1888 

,252,466,000 

18.9 

6,916,133,000 

iSgO 

,416,543,000 

18.1 

7,801,048,000 

iSgi 

,067,403,000 

15-5 

6,847,5O6,OOO 

1892 

,022,764,000 

15-7 

6,481.562,000 

1893 

,002,664,000 

15-4 

6,478,013,900 

1894 

964,455,000 

15-2' 

6,337,222,000 

1895 

1,304,679,000 

17.1 

7,592,886,000 

1  Arnaune,  382-84. 

2  The  largest  amount  of  bank-notes  used  in  1839  in  one  day  for  the 


THE  ADVANTAGES  OF  A   BANKING  CURRENCY.      559 

The  clearings  at  Paris  were  1,602,584,727  francs  in  the 
year  ending  March  31,  1873  ;  3,222,745,255  francs  in  1880  ; 
4,142,562,483  francs  in  1885  ;  5, 140, 959, 989  francs  in  1890  ; 
6,003,883,202  francs  in  1891  ;  and  5,379,348,428  francs  in 
1894.  These  figures,  however,  give  an  incomplete  idea  of 
the  banking  business  done  in  Paris.  A  great  central  bank 
operates  in  some  measure  as  a  clearing  house  in  itself,  and 
this  is  more  notably  the  case  with  the  Bank  of  France,  with 
its  comparatively  feeble  rivals,  than  with  the  Bank  of  Eng- 
land, surrounded  by  the  great  stock  banks  and  private  banks. 
The  last  report  of  the  Board  of  Regents  of  the  Bank  of 
France  shows  the  transactions  for  1894,  including  deposits 
of  bills  and  currency  and  transfers  by  checks  on  the  central 
bank,  to  have  been  61,500,196,400  francs  ($12,000,000,000), 
of  which  45,150,142,500  francs  was  in  checks,  15,098,022,600 
in  bank  bills,  and  1,252,031,300  francs  in  specie.  Thus 
three  times  the  net  income  of  all  Frenchmen  passes  annu- 
ally through  the  bank  in  the  form  of  currency  or  credits. 
The  regents  remark  that,  "  as  every  transfer  represents  a 
payment  and  a  receipt,  there  is  a  movement  of  funds  of 
ninety  milliards  effected  without  the  displacement  of  bills 
or  specie, ' '  and  they  add  that  they  have  a  right  to  say  that 
the  bank  "  fulfils  in  France,  without  cost  to  its  clients  and 
without  profit  for  itself,  the  functions  of  the  English  Clearing 
House."  ' 

The  Bank  of  France  has  kept  for  many  years  an  exact 
account  of  its  daily  receipts,  which  indicates  not  only  the 


payment  of  balances  was  ^593,900.  The  balances  settled  in  1879-80 
ran  as  high  as  ,£"5,334,000,  but  settlements  had  ceased  since  1854  to 
be  made  in  notes,  or  they  would  have  absorbed  one-fifth  of  the  circu- 
lation of  the  Bank  of  England. — London  Bankers'  Magazine,  Feb., 
1896,  LXL,  253. 

1  Assemblee  Generate  de  la  Banque  de  France,  du  31  Janvier, 
1895,  p.  7.  The  fact  that  money  transfers  are  so  much  in  excess  of 
incomes  is  due  to  the  fact  that  the  incomes  of  traders  represent  a 
much  larger  volume  of  transactions  than  their  profits,  which  figure 
as  net  income.  The  estimates  of  M.  L,eroy-Beaulieu  and  other  au- 
thorities put  the  net  incomes  of  Frenchmen  at  20,000,000,000  francs 
(f4,ooo,ooo,ooo),  equivalent  to  about  $107  per  capita,  or  1535  for  a 
family  of  five.—  La  Science  des  Finances,  I.,  380. 


56o 


HISTORY  OF  MODERN  BANKS  OF  ISSUE. 


vast  aggregate  of  its  transactions,  but  the  comparatively 
small  part  which  is  played  in  them  by  coin  and  bank-notes. 
The  figures  for  representative  years  have  been  as  follows  : 


YEAR. 

SPECIE. 

NOTES. 

TRANSFERS  OR 
CHECKS. 

TOTAL. 

(In  millions  of  francs.) 

1817 

534-9 

7,140.9 

7,675.8 

1820 

248.6 

6,406.8 

.... 

6,655.4 

1830 

624.4 

4,882.1 

2,382.2 

7,888.7 

1840 

955-9 

4,150.1 

3,281.4 

8,387.4 

1850 

2,327.7 

6,962.1 

3,499-3 

12,789.1 

i860 

6,629.1 

15,411.0 

11,488.4 

33,528.5 

1870 

6,458.1 

23,496.3 

19,037.2 

48,991.6 

1880 

5,323.3 

32,095.1 

32,713.5 

70,131.9 

1890 

3,098.8 

36,437.9 

43,330.7 

82,867.5 

1891 

3,002.2 

37,990.1 

48,745.0 

89,737.7 

1892 

2,712.1 

35,357.2 

37,451-6 

75,520.8 

1893 

3,168.5 

33,521-5 

38,090.5 

74,780.6 

1894 

2,727.5 

34,921.6 

46,170.0 

83,819.2 

The  exchanges  of  the  clearing  houses  in  the  United  States, 
although  far  from  comprehending  the  transactions  of  all  the 
banks,  have  several  times  been  in  excess  of  $50,000,000,000, 
or  more  than  the  net  annual  earnings  of  the  people.  Clear- 
ing houses  have  been  established  from  year  to  year  in  the 
smaller  cities  of  the  country,  until  there  are  in  1896  about 
seventy-five  as  compared  with  forty  in  1888,  but  the  clear- 
ings of  the  new  institutions  are  not  large  enough  to  greatly 
impair  the  value  of  the  comparisons  for  the  various  years. 
The  total  clearings  for  the  year  ending  September  30,  1888, 
were  $48,750,886,813;  for  1889,  $54,494,754,586;  for  1890, 
$59,882,477,513;  for  1891,  $56,803,253,957;  for  1892,  $60,- 
883,572,438  ;  for  1893,  $58,880,682,455  ;  for  1894,  $45,028,- 
496,746;  and  for  1895,  $5I,m, 591,928.  The  transactions 
of  the  New  York  Clearing  House  have  been  carefully  re- 
corded since  1854  and  the  following  figures  show  the  pro- 
gressive increase  in  representative  years  : 


THE  ADVANTAGES  OF  A   BANKING   CURRENCY.      561 


YEAR. 

CLEARINGS. 

BALANCES  PAID  IN  MONEY. 

PER  CENT.  OF 
BALANCES  TO 
CLEARINGS. 

1854 

$5,750,455,987 

$297,4I[,494 

5-2 

1860 

7,231,143,057 

380,693,438 

5-3 

1865 

26,032,384,342 

,035,765,108 

4.0 

1869 

37,407,028,987 

,I2O,3l8,3O8 

3-0 

1870 

27,804,539,406 

,036,484,822 

3-7 

i873 

35,46l,O52,826 

,474,508,025 

4.1 

1876 

21,597,274,247 

,295,O42,O29 

5-9 

1879 

25,178,770,691 

,400,111,063 

5.6 

1880 

37,182,128,621 

,516,538,631 

4.1 

1881 

48,565,8l8,2I2 

,776,018,162 

3-5 

1885 

25,250,791,440 

,295,355,252 

5-1 

1890 

37,66O,686,572 

,753,040,145 

4-7 

1891 

34,053,698,770 

,584,635,500 

4-6 

1892 

36,279,905,236 

,861,500,575 

5.1 

1893 

34,421,380,870 

,696,207,176 

4-9 

1894 

24,230,145,363 

,585,241,634 

6.5 

1895 

28,264,379,126 

,80,574,349 

6.7 

Several  investigations  during  the  last  two  decades  have 
shown  that  more  than  ninety  per  cent,  of  the  transactions 
through  banks  at  the  leading  commercial  cities  are  con- 
cluded by  means  of  checks,  bills  of  exchange  and  other 
instruments  of  credit,  exclusive  of  bank-notes.  The  last 
investigation  of  this  sort  in  the  United  States  was  made  by 
the  Comptroller  of  the  Currency  in  1892  and  called  upon  na- 
tional banks  to  separate  the  various  items  of  their  receipts  on 
September  i5th  of  that  year.  The  result  obtained  was  as 
follows  : 


LOCATION  OF  BANKS. 

NO.  OF 
BANKS. 

TOTAL    RECEIPTS. 

/  —  

COIN. 

—  PER  CENT 
PAPER 
CURRENCY. 

CHECKS, 
DRAFTS, 
ETC. 

New  York, 
Other  reserve  cities, 
Banks  elsewhere, 

United  States, 

48 
28l 

3,144 

$130,976,963 
116,514,324 
83,713,926 

O.II 

0.82 
3.80 

7-53 
6.44 
11.29 

92.36 
92.74 
84.91 

3,473 

$331,205,213 

1.29 

8.10 

90.61 

While  the  bewildering  aggregates  of  clearing  operations 
swell  from  year  to  year  with  the  increase  in  business  trans- 
actions, an  opposite  effect  has  been  produced  upon  the  clear- 
36 


562  HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

ing  house  records  by  the  creation  of  stock  exchange  clearing 
houses  for  the  settlement  of  transactions  in  negotiable  secur- 
ities. The  first  official  stock  exchange  clearing  house  was 
founded  at  Frankfort  in  May,  1867,  and  it  was  found  that 
settlements  involving  $250,000,000  in  securities  could  be 
made  by  the  payment  of  $5, 000,000  in  currency.  The  pri- 
mary feature  of  the  stock  exchange  clearing  houses  is  the 
setting  off  of  sales  of  stock  by  certain  brokers  against  pur- 
chases of  the  same  stock  by  other  brokers,  so  that  the  final 
balances  only  are  delivered  by  the  clearing  houses.  Several 
of  the  stock  exchange  clearing  houses  go  further,  however, 
and  settle  the  entire  money  balances  between  the  brokers. 
The  Berlin  exchange  adopted  the  clearing  system  in  1869, 
the  Hamburg  exchange  in  1870,  that  of  Vienna  in  1873,  and 
that  of  London  in  1876.  The  peculiar  organization  of  the 
Paris  Bourse  has  prevented  the  formation  of  a  regular  stock 
clearing  house  in  Paris,  but  the  same  results  are  obtained  by 
a  voluntary  comparison  of  accounts.  The  system  was  not 
introduced  at  New  York  until  1892,  when  a  committee  was 
appointed  to  investigate  and  report  and  their  report  was 
promptly  adopted.  The  new  plan  went  into  operation  on 
May  16,  1892,  and  has  worked  with  remarkable  success.1 
The  necessity  of  keeping  bank  deposits  to  cover  the  full  pay- 
ment for  stock  has  been  brought  to  an  end  and  accounts  are 
settled  by  the  payment  of  the  balances. 

The  effect  of  the  withdrawal  of  so  much  of  the  stock 
exchange  business  from  the  New  York  Clearing  House  has 
been  marked.  Comptroller  Knox  calculated  in  1881  that 
$113,000,000  of  the  sum  of  $141,000,000  received  by  the 
State  and  national  banks  of  New  York  City  on  a  given  day 
was  cleared  by  twenty-three  banks  having  relations  with 
brokers.  An  examination  of  their  clearings  disclosed  the 
fact  that  $80,000,000  was  in  certified  checks,  of  which  it  was 
estimated  that  90  per  cent.,  or  $72,000,000,  represented  stock 
transactions.  The  Comptroller  admitted  that  it  was  impos- 
sible to  determine  what  proportion  of  these  transactions  were 

1  Alexander  D.  Noyes  in  Political  Science  Quarterly,  June,  1893, 
VIII.,  260. 


THE  ADVANTAGES  OF  A   BANKING   CURRENCY.      563 

speculative  and  what  proportion  for  investment,  but  he  com- 
puted that  about  three-sevenths  of  the  whole  receipts  of  the 
New  York  banks  represented  speculative  transactions  on  the 
Stock  Exchange.  The  falling  off  in  clearings  since  1892  has 
not  been  nearly  so  great  as  this,  and  the  brokers  still  make 
large  incidental  use  of  the  banks,  but  the  establishment  of 
the  Stock  Exchange  Clearing  House  has  introduced  a  new 
factor  into  financial  transactions  which  has  to  be  considered 
in  computing  their  changes  in  volume.  The  record  of  the 
operations  of  three  years  through  the  New  York  Stock  Ex- 
change Clearing  House  is  as  follows  : 


TOTAL  VALUE. 


From  May  14,  1892,  to  May  I,  1893. 
225,325,800  $15,425,648,200  |  $4,484,600,000 

From  May  I,  1893,  to  May  i,  1894. 
219,974,200       |  $13,067,400,000  [     4,450,880,000 

From  May  I,  1894,  to  May  I,  1895. 
186,192,500       |  $12,278,700,000  |     4,363,700,000 


II.  What  has  gone  before  is  the  best  proof  of  the  close 
relation  of  the  currency  to  business  transactions  and  that 
currency  should  be  the  hand-maid  of  commerce  rather  than 
the  instrument  of  public  power.  A  government  paper  cur- 
rency has  rarely  been  issued  to  promote  the  convenience  of 
commerce  and  has  seldom  contributed  to  that  end.  The 
success  and  convenience  of  paper  credit  in  balancing  busi- 
ness transactions  has  led  in  many  minds  to  a  false  analogy 
between  the  evidences  of  such  credit  and  stamped  pieces  of 
paper,  issued  by  governments  in  discharge  of  public  obliga- 
tions. Governments  have  even  gone  further  and  claimed 
that  the  power  to  issue  paper  pledges  for  general  circulation, 
payable  to  bearer  on  demand,  was  an  attribute  of  sovereignty 
and  could  not  be  lawfully  assumed  by  a  citizen  or  a  corpora- 
tion.1 But  this  is  not  the  true  theory  of  currency.  Experi- 

1  The  determination  of  the  legal  question  is  now  largely  a  matter  of 
positive  law,  but  it  was  admitted  in  England  that  at  common  law  the 


564  HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

ence,  as  well  as  theory,  have  proved  that  government  paper 
money  is  essentially  different  in  character  from  banking 
paper  and  opens  a  Pandora's  box  of  evil  for  every  nation 
which  issues  it. 

The  difference  between  government  paper  currency  and 
bank-notes  is  not  one  of  experience  or  accident  merely  ;  it  is 
a  difference  which  is  fundamental.  Banking  institutions  are 
subject  to  the  law  ;  the  state  is  the  power  which  makes  the 
law.  Bank  paper  is  based  upon  business  transactions  and 
is  limited  by  their  demands  ;  government  paper  is  based 
upon  the  will  of  the  state  and  is  limited  only  by  its  neces- 
sities. The  almost  invariable  rule  of  government  paper 
issues  is  that  one  begets  another,  until  the  entire  volume 
exceeds  the  legitimate  demands  of  business,  upsets  values, 
and  goes  beyond  the  reach  of  restoration  to  the  metallic 
standard.  A  government  is  not  only  not  under  no  restraint 
of  law  when  tempted  to  pass  the  limits  of  safety  in  its  paper 
issues,  but  there  are  no  natural  and  automatic  limits  fixed 
by  the  conditions  of  the  note  issues,  as  in  the  case  of  banks. 
A  banking  currency,  when  not  disturbed  by  the  public  au- 
thority, except  to  enforce  uniformity,  safety,  and  converti- 
bility with  coin,  is  automatically  responsive  to  the  demands 
of  business.  When  business  is  active  such  a  currency  is 
expansive  in  proportion  to  its  needs  ;  when  business  slack- 
ens the  notes  return  to  their  issuers  for  redemption,  the 
volume  of  paper  money  is  reduced,  and  the  parity  of  coin 
and  paper  is  constantly  maintained. 

The   evils   of  government   interference  with  the  natural 

power  to  issue  bank-notes  was  unrestricted,  and  in  France  the  power 
was  freely  used  until  after  the  creation  of  the  Bank  of  France.  The 
power  of  the  government,  according  to  the  soundest  modern  theories, 
should  be  limited  to  giving  an  official  certificate  of  the  weight  and 
fineness  of  bullion  by  fixing  a  standard  coin  as  the  unit ;  and  the 
failure  in  the  long  run  to  accomplish  anything  else  was  illustrated  in 
ancient  times  by  the  changes  in  prices  which  followed  the  use  of 
"the  power  of  sovereignty  "  to  debase  the  value  of  the  coins,  and  has 
been  illustrated  in  modern  times  by  the  similar  changes  which  have 
followed  the  use  of  the  same  power  to  give  value  to  legal-tender  paper 
money. 


THE  ADVANTAGES  OF  A   BANKING   CURRENCY.      565 

laws  of  a  banking  currency  are  second  only  to  the  evils  of 
direct  issues  of  government  paper  money.  The  very  sol- 
vency and  credit  which  sound  banks  have  attained  have 
been  turned  against  them  when  they  have  been  seized  upon 
to  supply  the  necessities  of  governments.  This  was  the  case 
in  the  infancy  of  modern  banking,  when  ' '  time  and  experi- 
ence," in  the  language  of  Cantillon,  taught  the  Venetians 
that  the  over- issue  of  notes  for  the  purposes  of  war  destroyed 
the  parity  of  coin  and  paper,  upset  prices,  and  diminished 
the  revenue  of  the  republic.1  It  was  the  case  in  France, 
when  Necker  wrecked  the  Caisse  d'  Escompte  by  the  advances 
which  he  demanded  from  it.  It  was  the  case  in  England, 
when  Pitt  pumped  almost  dry  the  reservoirs  of  the  Bank  of 
England  to  carry  on  the  Napoleonic  wars.  It  was  the  case 
in  France  again,  when  Napoleon,  at  the  summit  of  his  glory 
after  Austerlitz,  returned  to  Paris  to  find  the  Bank  of  France 
compromised  by  advances  to  the  State.  It  has  been  more 
recently  the  case  in  Italy,  where  loans  to  public  men  have 
been  governed  by  political  motives  rather  than  the  sound 
rules  of  commercial  transactions.  It  has  been  the  case  also 
in  Spain,  where  the  absorption  of  the  note  issues  of  the  Bank 
of  Spain  in  loans  to  the  government  has  crippled  commerce 
and  flooded  the  country  with  a  depreciated  paper  currency. 
The  volume  of  bank  currency  in  these  cases  has  become  no 
longer  responsive  to  the  needs  of  commerce,  but  the  measure 
of  the  hard  necessities  of  the  state.  Under  such  circum- 
stances, as  M.  Clement  Juglar  remarks  of  the  increase  in  the 
Bank  of  England  circulation  during  the  Napoleonic  wars, 
"  We  are  no  longer  in  the  presence  of  a  real  credit  circula- 
tion, but  of  advances  which  represent  no  commercial 
operation  ;  which  explains  how  in  more  recent  times  the 
movements  of  circulation,  released  from  this  pressure,  are 
no  longer  the  same  and  are  obedient  to  other  influences." 

The  advantage  which  banks  enjoy  over  the  public  authori- 
ties in  controlling  the  monetary  circulation  is  due  to  their 
banking  powers.  These  powers  grow  out  of  the  connection  be- 

1  Essai  sur  le  Commerce^  411-12. 
5  Des  Crises  Commentates,  219. 


566  HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

tween  the  volume  of  the  currency  and  commercial  movements, 
but  they  are  exercised  by  peculiar  methods  which  are  be- 
yond the  reach  of  the  most  skilful  and  prudent  public  official. 
It  is  the  power  to  push  the  interest  rate  up  or  down  which 
has  been  proven  to  be  the  regulator  at  once  of  the  foreign 
exchanges  and  of  the  domestic  supply  of  currency  and  loan- 
able capital.1  No  such  automatic  regulator  can  act  upon  a 
government  paper  currency,  because  the  government  does 
not  do  a  banking  business.  The  state  is  not  a  money  lender 
nor  a  receiver  of  deposits  payable  on  demand.  It  can  neither 
retain  gold  at  home  by  raising  the  discount  rate  nor  govern 
the  volume  of  its  paper  issues  by  business  conditions.  The 
Secretary  of  the  Treasury  of  the  United  States  has  sat  help- 
lessly in  his  chair,  while  the  gold  reserve  has  dwindled, 
armed  with  no  power  to  arrest  the  drain  unless  an  enormous 
surplus  permitted  the  retention  of  redeemed  notes  in  the 
Treasury  cash.  He  found  himself  without  this  resource  in 
the  period  of  redundant  currency  which  followed  the  crisis 
of  1893.  The  result  was  an  export  of  gold,  under  the  relent- 
less operation  of  Gresham's  law,  which  the  machinery  of 
the  government  was  powerless  to  arrest.  The  mass  of  need- 
less paper  money  issued  under  the  Act  of  1890  pressed  stead- 
ily upon  the  coin  and  expelled  the  surplus  in  the  form  of 
gold.  What  the  Treasury  proved  incompetent  to  do  was  ac- 
complished in  a  measure  in  the  summer  of  1895  ^y  a  syndi- 
cate of  banking  houses,  because  of  their  power  to  influence 
the  exchanges. 

III.  While  much  which  has  preceded  is  applicable  to  the 
banking  powers  possessed  by  banks  of  discount  and  deposit, 
without  the  power  of  issuing  circulating  notes,  there  remains 
to  be  defined  a  peculiar  advantage  of  banking  which  cannot 
be  obtained  without  the  power  of  note  issue.  This  advan- 
tage lies  in  the  introduction  of  banking  methods  into  a 
country  in  which  they  have  not  attained  full  development. 
A  banking  currency  paves  the  way  for  deposit  banking.  It 
is  much  easier  to  found  a  profitable  bank  of  issue  than  a 


1  I7idep.  17. 


THE  ADVANTAGES  OF  A   BANKING  CURRENCY.      567 

bank  of  deposit,  for  notes  can  be  quickly  put  out,  based  upon 
capital  and  the  commercial  paper  offered  for  discount ;  but 
deposits  come  more  slowly  by  the  voluntary  act  of  deposit- 
ors. Deposit  banking  is  still  in  its  infancy  outside  Great 
Britain,  Canada,  and  the  United  States,  as  a  glance  at  the 
relative  deposits  and  note  issues  of  the  great  Europern  banks 
plainly  shows  ;  and  even  in  the  United  States  it  has  only 
attained  full  development  in  the  great  commercial  cities  of 
the  North.  The  method  in  which  note  issues  pave  the  way 
for  deposit  banking  is  well  described  by  Mr.  Walter  Bagehot 
thus  : 

The  way  in  which  the  issue  of  notes  by  a  banker  prepares  the 
way  for  the  deposit  of  money  with  him  is  very  plain.  When  a  pri- 
vate person  begins  to  possess  a  great  heap  of  bank-notes,  it  will  soon 
strike  him  that  he  is  trusting  the  banker  very  much,  and  that  in  re- 
turn he  is  getting  nothing.  He  runs  the  risk  of  loss  and  robbery  just 
as  if  he  were  hoarding  coin  ;  he  would  run  no  more  risk  by  the  fail- 
ure of  the  bank  if  he  made  a  deposit  there,  and  he  would  be  free  from 
the  risk  of  keeping  the  cash.  No  doubt  it  takes  time  before  even  this 
simple  reasoning  is  understood  by  uneducated  minds.  So  strong  is 
the  wish  of  most  people  to  see  their  money  that  they  for  some  time 
continue  to  hoard  bank-notes  ;  for  a  long  period  a  few  do  so  :  but  in 
the  end  common-sense  conquers, — the  circulation  of  bank-notes  de- 
creases and  the  deposit  of  money  with  the  banker  increases.  The 
credit  of  the  banker  having  been  efficiently  advertised  by  the  note, 
and  accepted  by  the  public,  he  lives  on  the  credit  so  gained  years  after 
the  note  issue  itself  has  ceased  to  be  very  important  to  him.  .  .  . 

A  system  of  note  issues  is  therefore  the  best  introduction  to  a  large 
system  of  deposit  banking.  As  yet,  historically,  it  is  the  only  intro- 
duction ;  no  nation  as  yet  has  arrived  at  a  great  system  of  deposit 
banking  without  going  first  through  the  preliminary  stage  of  note 
issue  ;  and  of  such  note  issues  the  quickest  and  most  efficient  in  this 
way  is  one  made  by  individuals  resident  in  the  district  and  conversant 
with  it.1 

In  proof  of  the  last  assertion  may  be  cited  the  banking 
history  of  Scotland,  where  the  issue  of  notes  is  now  a  trifling 
part  of  the  liabilities  of  the  banks,  but  where  the  profits  were 
originally  derived  almost  entirely  from  the  circulation.  The 
Bank  of  Dundee,  founded  in  1763,  had  for  twenty-five  years 

1  Lombard  Street,  Works,  V.,  59-61. 


568  HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

no  deposits  whatever,  but  subsisted  on  the  profits  of  its  note 
issues  and  some  incidental  remittance  business.  Nothing" 
could  better  illustrate  the  graphic  words  of  M.  Juglar  : 

The  power  of  creating  bills  has  this  great  advantage,  that  it  per- 
mits a  bank  to  be  born  ;  and  this  is  the  important  point  for  small 
towns,  far  from  great  centres,  where  the  channels  of  circulation  of 
the  large  banks  fail  to  penetrate.  These  new  promises  to  pay,  added 
to  those  of  the  state,  give  a  new  activity  to  exchanges  and  place  a 
new  capital  at  the  disposition  of  everyone ;  and  the  rate  of  interest 
tends  to  fall  and  even  the  intensity  of  crises  is  diminished.1 

A  banking  currency,  therefore,  forms  the  readiest  means 
of  introducing  the  use  of  credit  and  stimulating  the  produc- 
tion of  commodities  and  the  transfer  of  capital.  A  certain 
volume  of  currency  of  some  sort  is  absolutely  essential  to 
the  commercial  life  of  a  people.  The  supply  varies  with 
commercial  habits,  and  the  demand  is  greatest  where  the 
use  of  credit  is  least  developed  and  large  exchanges  are 
made  by  the  methods  of  actual  barter  and  cash  payment. 
Bankers,  as  Prof.  MacLeod  so  happily  says,  are  "  dealers  in 
credit."  Under  a  fully  developed  credit  system,  the  buyer 
of  credits  is  content  to  draw  checks  against  the  credit  trans- 
ferred to  his  account,  because  those  checks  are  readily  ac- 
cepted as  a  substitute  for  money.  If  checks  are  not  readily 
accepted  and  if  money  is  lacking,  purchases  and  sales  of 
credit  are  reduced  and  capital  lies  idle  and  unproductive. 
Such  is  the  situation  of  a  new  country,  whose  people  have 
neither  become  generally  accustomed  to  deposit  and  credit 
banking  nor  have  the  power  to  issue  a  credit  currency  be- 
cause restrained  by  prohibitory  laws.  This  poverty  of  the 
means  of  carrying  on  transactions  is  a  striking  feature  of 
the  condition  of  many  parts  of  the  Southern  and  Western 
sections  of  the  United  States,  and  the  remedy  lies  in  an  ex- 
pansive currency  which  shall  make  exchange  easier  and 
afford  the  buyer  of  credit  an  instrument  which  he  can  read- 
ily use.  The  relative  equipment  of  these  States  in  banking- 

1  Des  Crises  Commerciales,  183. 


THE  ADVANTAGES  OF  A   BANKING  CURRENCY.      569 


power  in  comparison  with  the  better  equipped  States  of  the 
Northeast  is  illustrated  by  the  following  figures  :  * 


STATE. 

BANKING 
POWER  PER 
CAPITA. 

STATE. 

BANKING 
POWER  PER 
CAPITA. 

Rhode  Island, 

$377-55 

South  Dakota, 

$21.83 

Massachusetts, 
New  York, 

328.02 
298.74 

Georgia, 
South  Carolina, 

18.53 
13.89 

Connecticut, 

279-35 

Mississippi, 

10.21 

Pennsylvania, 

II2.8I 

North  Carolina, 

9.56 

Illinois, 

77.98 

Alabama, 

7-49 

Minnesota, 

65.38 

Arkansas,    • 

6.90 

The  peculiar  advantage  of  a  banking  currency  issued  by 
a  network  of  local  banks  is  in  affording  banking  accommo- 
dation to  all  parts  of  the  country  where  the  system  prevails. 
In  this  respect,  if  in  no  others,  a  system  of  local  banks  en- 
joys an  advantage  over  a  great  national  bank  in  promoting 
the  development  of  industry  and  commerce.  A  government 
paper  currency  does  practically  nothing  to  promote  the 
banking  facilities  of  the  people,  and  a  single  bank  of  issue 
usually  promotes  the  commerce  of  the  capital  where  it  is 
located  at  the  expense  of  the  commerce  of  outlying  sec- 
tions. This  was  peculiarly  the  case  in  France  before  the 
establishment  of  the  independent  departmental  banks  and  it 
became  the  case  again  after  those  banks  were  deprived  of 
the  power  of  note  issue.  Banking  in  France  was  in  the 
primary  stage  of  development,  where  note  issues  were  essen- 


1  These  figures  are  taken  from  the  Report  of  the  Comptroller  of  the 
Currency  for  1895,  p.  512,  and  include  the  aggregate  capital,  surplus, 
undivided  profits,  and  individual  deposits  of  national  banks  on  July 
n,  1895,  and  of  State,  stock  savings,  and  private  banks  and  loan  and 
trust  companies  at  date  of  latest  reports.  The  average  banking  power 
per  capita  for  the  United  States  is  computed  at  $95.83.  It  is  a  com- 
mon opinion,  among  those  who  have  studied  the  subject,  that  this 
poverty  of  banking  power  in  the  South  has  greatly  stimulated  the 
demand  there  for  a  larger  metallic  circulation,  and  that  laws  provid- 
ing better  banking  accommodation,  by  permitting  the  issue  of  circu- 
lating notes  upon  general  banking  assets,  would  do  much  to  diminish 
this  demand. 


570  HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

tial  to  profitable  banking,  and  the  independent  banks  made 
most  of  their  profits  by  means  of  note  issues  and  with  but 
trifling  private  deposits.1  The  promotion  of  the  banking 
facilities  of  the  capital  at  the  expense  of  other  sections  has 
been  the  feature  of  all  the  great  national  banks  of  Europe, 
— at  Vienna  and  Buda  Pesth,  at  Berlin,  at  St.  Petersburg, 
and  at  Madrid, — and  the  countries  in  which  they  are  situ- 
ated have  lagged  far  behind  England,  Scotland,  Switzerland, 
the  United  States,  and  Canada  in  the  development  of  their 
industrial  activity.  3 

The  power  to  establish  branches  has  not  proved  a  suffi- 
cient substitute  for  the  power  to  create  independent  banks 
in  the  introduction  of  facilities  for  credit  and  in  the  expan- 
sion of  commercial  operations,  where  the  power  of  note 
issue  has  been  lodged  in  a  single  great  institution.  Manda- 
tory legislation  was  required  in  France  to  compel  the  Bank 
of  France  to  establish  branches  in  each  department  and  as 
late  as  1865  only  fifty-five  branches  had  been  created,  or  at 
the  rate  of  one  for  700,000  inhabitants.3  The  essential  de- 
fect of  branch  banking  of  this  sort  is  the  system  of  bureau- 

1  The  aggregate  circulation  of  the  nine  independent  banks  in  1847, 
— the  last  year  before  their  suppression, — was  90,100,000  francs  ($18,- 
000,000),  while  their  deposits  on  current  accounts  were  only  16,800,- 
ooo),  francs  ($3,350,000.) 

2  Mr.  Bagehot  cites  the  comparative  history  of  the  Bank  of  France 
and  the  banks  of  Switzerland  in  proof  of  the  assertion  that  "  A  single 
monopolist  issuer,  like  the  Bank  of  France,  works  its  way  with  diffi- 
culty through  a  country,  and  advertises  banking  very  slowly."     The 
note  issues  of  the  Bank  of  France  in  1865  were  equal  to  ^"112,000,000 
and  the  deposits  were  only  ^15,000,000.     The  Swiss  banks,  on  the 
other  hand,  showed  note  issues  equal  to  ^761,000  and  deposits  of 
^4,709,000.     The  private  deposits  of  the  Bank  of  France  had  risen 
on  July  n,   1895,  to  426,390,693  francs  and  private   deposits  at  the 
branches  were  62,873,753  francs,  but  they  amounted  together  to  less 
than  one-seventh  of  the  circulation,  which  was  3,503,503,270  francs. 

3  Scotland  at  that  time  had  a  branch  bank  for  every  5100  of  her 
people, — the  equivalent  of  137  times  the  banking  facilities  of  France. 
A  like  multiplication  of  banking  facilities  in  the  latter  country  would 
require  10,000  branches  of  the  Bank  of  France  and  the  number  of  all 
classes  had  risen  in  1895  to  only  259. 


THE  ADVANTAGES  OF  A   BANKING  CURRENCY.      5/1 

cracy  under  which  it  is  usually  conducted  and  the  absence 
of  sympathy  between  local  business  interests  and  the  direct- 
ing authority  at  the  head.1  The  effect  of  such  a  system  also 
in  attracting  deposits  and  solvent  borrowers  is  very  different 
from  that  of  a  bank  managed  by  men  of  whom  something 
is  known  in  the  locality.  The  first  branches  of  the  Bank  of 
France  proved  unprofitable,  but  the  independent  depart- 
mental banks  which  followed  them  earned  unusual  divi- 
dends. The  reason  for  the  difference  is  hinted  at  by  M. 
Horn  as  follows  : 2 

The  countryman,  prudent  and  timid  in  his  nature,  confides  his 
small  savings  willingly  only  to  those  whom  he  personally  knows, 
only  to  an  association  sprung  from  the  heart  of  the  local  community, 
only  to  a  bank  created  and  directed  by  men  who  have  deep  root  in  the 
locality,  only  to  institutions  in  which  he,  his  relatives,  or  his  friends 
are  directly  interested. 

Branch  banking  may,  however,  prove  of  great  value  in 
promoting  banking  facilities  if  absolute  monopoly  of  note 
issues  does  not  prevail  at  the  centre  of  the  system.  The 
competition  of  a  few  great  banks,  authorized  to  issue  their 
own  notes  through  their  branches,  has  proved  more  success- 
ful, in  equipping  Scotland  and  Canada  with  facilities  for 
credit,  than  the  system  of  smaller  local  banks,  without  the 
power  of  issuing  notes  upon  assets,  has  proved  in  the  United 
States.  A  system  of  strong  central  banks  with  numerous 
branches  means  a  much  wider  extension  of  banking  facili- 
ties than  would  be  possible  where  each  bank  was  indepen- 
dent. It  means  not  only  the  ready  transfer  of  capital  from 
points  where  it  is  plentiful  to  points  where  it  is  lacking,  but 
it  means  that  a  community  too  small  to  support  an  indepen- 
dent bank  may  enjoy  the  advantage  of  a  branch.  A  single 
official,  possessing  knowledge  of  local  conditions,  would  pre- 
side over  a  branch  and  take  the  place  of  president,  cashier, 


1  Even  the  slow  progress  of  popular  credit  banks  in  France  was  at- 
tributed to  the  system  of  centralization  which  governs  her  financial 
policy,  by  the  jury  on  social  economy  of  the  Paris  Exposition  of  1889. 
— Economic  Sociale,  par  Leon  Say  ;  Rapport  General,  322. 

2  La  Liberte  des  Banques,  438. 


5/2  HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

and  board  of  directors  of  an  independent  local  bank.  A 
small  branch  would  involve  no  investment  in  an  idle  coin 
reserve,  for  the  funds  of  the  branch  would  consist  in  the 
notes  of  the  parent  bank,  which  would  represent  no  expense 
until  they  were  issued.  The  system  of  branches  has  re- 
sulted in  Scotland  and  Canada  in  the  ready  transfer  of  the 
savings  of  the  agricultural  sections  to  the  manufacturing 
cities,  while  the  branches  in  the  cities  have  stood  ready  to 
furnish  capital  for  the  farming  districts  on  the  less  frequent 
occasions  when  it  has  been  needed.  The  transfer  of  capital 
in  this  way  has  been  carried  on  to  some  extent  in  England 
by  the  practice  of  rediscounting,  but  this  prevents  accurate 
knowledge  of  many  of  the  facts  regarding  the  paper  offered 
for  rediscount,  which  would  be  known  to  the  central  bank 
under  the  branch  system  and  involves  elements  of  danger 
readily  understood  by  every  banker.1 

IV.  One  of  the  essential  conditions  of  a  sound  currency  is 
redemption  in  coin  on  demand.  This  is  the  touchstone  and 
proof  of  the  equality  of  paper  with  coin  and  of  the  mainte- 
nance of  the  standard  of  value.  A  banking  currency  is  usu- 
ally subject  by  law  to  the  condition  of  coin  redemption  ;  a 
government  paper  currency  is  rarely  subject  to  such  a  con- 
dition. Governments  seldom  resort  to  the  issue  of  paper 
money  until  their  lack  of  credit  impairs  their  other  resources. 
Their  issues  are  then  expanded  to  the  point  where  they  be- 
come redundant,  even  after  they  have  driven  out  all  other 
currency  and  filled  its  place.  An  issue  too  small  to  become 
redundant,  and  which  was  maintained  steadily  at  par  with 
the  metallic  standard,  would  be  too  small  for  the  purposes 
which  usually  control  the  action  of  governments  in  resorting 
to  paper  currency. 

Even  a  limited  issue  of  paper  is  maintained  at  par  by  a 
government  with  much  greater  difficulty  than  by  well  regu- 
lated banks.  The  reason  is  fundamental.  Governments 
have  no  quick  assets.  The  advocates,  of  government  paper 

"The  abuses  connected  with  rediscount  by  fictitious  bills  are  ef- 
fectually prevented,  and  the  bank  can  more  readily  regulate  its  ad- 
vances in  accordance  with  its  means."— Gilbart,  II.,  210. 


THE  ADVANTAGES  OF  A   BANKING   CURRENCY.      573 

money  are  fond  of  declaring  that  a  national  currency  is 
based  on  the  aggregate  wealth  and  credit  of  the  entire  na- 
tion. But  they  miss  the  purpose  of  currency  and  of  banks 
of  issue.  It  is  not  wealth  in  the  abstract  which  currency 
must  represent,  but  quickly  negotiable  wealth.1  The  essen- 
tial question  in  regard  to  government  paper  money  is  not 
whether  government  and  people  have  wealth,  but  whether 
the  government  is  equipped  with  negotiable  assets  to  do  a 
banking  business.  Mirabeau  missed  this  distinction,  in 
tirging  the  issue  of  the  assignats  upon  the  French  Assembly, 
when  he  declared  : 

They  represent  real  property,  the  most  secure  of  all  possessions, — 
the  laud  on  which  we  tread.  Why  is  a  metallic  circulation  solid? 
Because  it  is  based  upon  subjects  of  real  and  durable  value,  as  the 
land  which  is  directly  or  indirectly  the  source  of  all  wealth.  Paper 
money,  we  are  told,  will  become  superabundant ;  it  will  drive  the 
metallic  out  of  circulation.  Of  what  paper  do  you  speak  ?  If  of  a 
paper  without  a  solid  basis,  undoubtedly  ;  if  of  one  based  on  the  firm 
foundation  of  landed  property,  never. 

It  was  a  plausible  argument  and  if  it  was  a  sound  one  the 
French  paper  money  should  not  have  depreciated  below  par, 
because  it  did  not  for  a  long  time  exceed  in  volume  the 
value  of  the  national  domains  which  were  pledged  as  its 
security.  But  the  assignats  fell  until  they  were  worth  one- 
thousandth  part  of  their  face  value.  The  government  then 
put  the  theory  of  landed  security  to  a  closer  test  by  issuing 
territorial  mandates,  redeemable  in  land  on  demand,  but  they 
fell  also  to  one-fortieth  part  of  their  face  value  and  few  hold- 
ers were  disposed  to  take  the  scattered  domains  of  the  state 
as  the  equivalent  of  current  money.2  The  distinction  be- 

1  "  A  relative  of  mine,  C.  Poulett  Thomson,  afterwards  Lord  Syden- 
ham,  many  years  since,  used  to  say  to  me  that  nothing  was  easier  to 
conduct  than  the  business  of  a  banker,  if  he  would  only  learn  the 
difference  between  a  mortgage  and  a  bill  of  exchange."— Hankey,  25. 

2  As  Blanqui  tersely  puts  it,  in  comparing  the  assignats  with  the 
notes  of  the  Bank  of  England  during  the  first  years  of  suspension, 
"  The  one  sort,   exchangeable  for  land,  were   worth   nothing ;    the 
others,  although  deprived  of  their  specie  guarantee,  preserved  their 
nominal  value." — Histoire  d'  Economic Politique  en  Europe,  II.,  176. 


574  HISTORY  OF  MODE  KM  BANKS   OF  ISSUE. 

tween  such  security  and  the  security  of  institutions  doing  a 
sound  banking  business,  while  not  always  grasped  by  those 
unfamiliar  with  the  subject,  is  of  supreme  importance. 
Banking,  in  the  technical  sense,  consists  in  dealing  in  com- 
mercial paper  for  short  terms.  Few  governments  have  any 
quick  assets  beyond  the  actual  coin  in  their  vaults',  while  a 
well-managed  bank  has  assets,  in  the  form  of  commercial 
paper  and  securities,  in  excess  of  all  its  liabilities,  both  to 
note-holders  and  depositors,  of  which  all  but  a  small  per- 
centage can  be  quickly  turned  into  cash.  The  government, 
beyond  its  actual  cash  in  hand,  has  only  two  corresponding 
resources  — the  pledge  of  public  property  and  the  power  of 
taxation.  Custom  houses  and  highways,  field  guns  and 
ironclads,  are  not  the  sort  of  assets  which  can  be  quickly 
marketed  or  put  in  pawn  to  borrow  money,  and  the  power 
of  taxation  is  even  less  efficient  as  security  for  a  banking 
business.  It  is  in  the  nature  of  an  assessment  upon  the 
stockholders,  which  is  a  worthless  resource  during  solvency 
and  is  resorted  to  only  for  liquidation  after  suspension  of 
payments.1 

The  peculiar  strength  of  a  banking  currency  lies  in  the 
enormous  mass  of  quick  assets  behind  its  demand  liabilities. 
The  United  States  Treasury,  even  if  all  its  financial  opera- 
tions of  receipt  and  disbursement  are  viewed  as  banking 
transactions,  handles  less  than  one-fifteenth  of  the  average 
quick  assets  of  the  banks  of  the  country  and  an  infinitely 
smaller  proportion  of  their  gross  receipts  during  the  year. 
The  largest  balance  in  the  Treasury  in  recent  years  was 
$778,604,339  on  June  30,  1892.  The  aggregate  capital,  sur- 
plus, undivided  profits,  and  individual  deposits  of  national 
and  State  banks,  loan  and  trust  companies,  and  savings  and 


1  "  The  Treasury  is  like  a  bank,  in  which  the  stockholders  are  liable 
for  all  its  debts,  and  have  bound  themselves  to  put  in  ample  cash 
capital  whenever  it  is  wanted,  but  in  which  no  cash  capital  has  yet 
been  called  up.  The  Treasury  has  no  bills  receivable,  no  promises  of 
other  people  to  pay  it  gold  coming  due  from  day  to  day." — Charles 
C.  Jackson,  "  Why  Legal  Tender  Notes  Must  Go,"  Sound  Currency, 
Vol.  III.,  No.  2,  p.  3. 


THE  ADVANTAGES  OF  A   BANKING   CURRENCY.      575 

private  banks  in  the  United  States,  according  to  reports  on 
or  about  that  date,  was  $6,390,094,128  and  the  same  items 
about  June  30,  1895,  were  $6,703,544,084.  The  capital  of 
the  banking  institutions  of  the  country,  therefore,  was  not 
less  than  eight  times  the  cash  assets  of  the  Treasury  of  the 
United  States  and  was  much  less  restricted  to  special  objects. 
For,  of  government  funds  on  June  30,  1892,  $141,325,339 
was  set  aside  for  the  redemption  of  gold  certificates  and 
$326,880,803  for  the  redemption  of  silver  certificates,  leaving 
only  about  $310,000,000  to  meet  all  other  demands  both  for 
daily  transactions  and  for  the  protection  of  circulating  legal 
tender  notes.  A  portion  of  the  funds  of  the  banks  are  set 
aside,  for  special  purposes,  but  in  no  such  proportion  as  those 
of  the  Treasury. 

Turning  to  the  actual  flow  of  money  through  the  Treasury 
and  through  the  banks,  the  proportion  is  still  greater  in 
favor  of  the  banks.  The  gross  receipts  from  all  sources  of 
public  revenues,  including  the  postal  service,  during  the 
fiscal  year  1895  were  $390,373,203,  or  a  little  more  than 
$1,000,000  per  day.  The  gross  receipts  of  the  banks  can 
only  be  partially  ascertained,  but  the  transactions  through 
the  clearing  houses  alone  during  the  year  ending  September 
30,  1895,  were  $51,111,591,928,  or  an  average  of  nearly 
$140,000,000  per  day.  In  the  stream  of  money  pouring 
through  their  hands,  available  to  meet  current  demands,  the 
banks  of  the  United  States  are,  therefore,  nearly  one  hun- 
dred and  forty  times  stronger  than  the  Treasury. 


LIST  OF  AUTHORITIES 

CONSULTED  IN  THE  PREPARATION  OF  THIS  WORK. 


The  following  are  the  full  titles  of  the  leading  financial  and  historical 
authorities  consulted  in  the  preparation  of  this  work  and  referred  to  in  the 
text.  Certain  public  documents  referred  to  for  particular  facts,  and  fully 
described  where  cited,  are  not  given  here.  The  works  are  cited  in  the  text  by 
the  name  of  the  author  only,  where  only  one  of  his  works  has  been  used, 
and  with  the  name  of  the  work  in  addition  where  two  or  more  works  of  the 
same  author  have  been  used  ; 

r-  ADAMS,  HENRY.     History  of  the  United  States  of  America.     9  vols.     New 

York,  1889-91. 
ALLARD,  ALPHONSE.     La  Crise  Agricole  el  Mone'taire.     Brussels  and  Paris, 

1895. 

ANSIAUX,  MAURICE.     La  Question  Mone'taire  en  Belgique.     Liege,  1892. 

ARNAUNE,  AUGUST.     La  Monnaie,  le  Credit  et  le  Change.     Paris,  1894. 

p-   BAGEHOT,   WALTER.     Complete    Works.     Edited  by   FORREST   MORGAN. 

5  vols.     Hartford,  1889. 
-     Bankers',  Insurance  Managers',  and  Agents'  Magazine.     London,  published 

monthly. 

BANQUE  DE  FRANCE.     Assemble  Ge'ntrale  des  Actionnaires  de  la  Banque  de 
France  du  ji  Janvier,  1895.     Sous  la  Presidence  de  M.  J.  MAGNIN, 
Gouverneur.     Paris,  1895. 
BLANQUI.     Histoire  de  F  Economic  Politiqite  en  Europe  dcpuis  les  Anciens, 

jusqiia  Nos  Jours.     2  vols.     Paris,  1860. 
~\  BOLLES,  ALBERT  S.      The  Financial  History  of  the  United  States.     3  vols. 

New  York,  1884-86. 

BOISSEVAIN,  G.  M.     La  Question  Mone'taire.     Paris,  1895. 
BRECKENRIDGE,  ROELIFF  MORTON.      The  Canadian  Banking  System,  i8i~- 
iSqo.     Publications  of  the  Amer.  Economic  Association,  X.,  1-3.  New 
York,  1894. 

Bulletin  de  Statislique  et  Legislation  Compare's  ( Official  monthly  publication 
of  the  French  Government).     Paris. 

577 


578  LIS T  OF  A  UTHORITIES. 

Bulletin,  Russe  de  Statistique  Financier e  et  de  Legislation.     St.  Petersburg. 

Printed  monthly  at  the  Ministry  of  Finance. 
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INDEX. 


(The  names  of  important  banks  will  be  found  under  the  distinctive 
part  of  the  name  rather  than  under  the  title  "  Bank.") 


Accommodation  bills,  468. 
Africa,   South,  banking  in,  448- 

50. 
Alabama,  experiments  with  State 

banking,  332-34. 
Algeria,  Bank  of,  451. 
Amsterdam,  Bank  of,  origin,  259  ; 

method    of  redemption,    260; 

failure,  261  ;   failure  to  prevent 

credit  crisis,  468. 

Arbitrage,  contributes  to  settle- 
ment of  French  war  indemnity, 

66. 
Argentine  Republic,  banking  in, 

420-22  ;  speculation  before  1890, 

519. 

Assets,  necessity  that  they  be 
quickly  negotiable,  13-15  ;  in- 
efficiency of  government  assets, 

574-75- 

Assignats,  issue  and  abandon- 
ment in  France,  49 ;  Mirabeau's 
misconception,  573. 

Atkinson,  Edward,  opinion  that 
certificates  of  deposit  are  not 
subject  to  federal  tax,  365, 
note. 

Australia,  banking  system  of,  or- 
ganization, 443  ;  expansion  of 
loans  on  land,  444-45  ;  clouds 
in  the  future,  445-46 ;  with- 
drawal of  British  deposits,  522  ; 
crisis  of  1893,  551-53. 


Austria,  National  Bank  of,  foun- 
dation, 214;  effect  of  specie 
suspension,  216  ;  attempt  to  re- 
sume, 218  ;  regulations  govern- 
ing circulation,  220 ;  converted 
into  Austrio-Hungarian  Bank, 
223  ;  loan  son  securities  in  1873, 

513.. 

Austria,  struggles  with  paper 
money,  209-213 ;  efforts  to  re- 
sume specie  payments,  216-18 ; 
union  with  Hungary,  222  ; 
adoption  of  gold  standard,  225- 
27;  retirement  of  pa  per  money, 
228  ;  delay  in  resumption,  229  ; 
development  of  deposit  certifi- 
cates, 234. 

Austro-Hungarian  Bank,  formed 
from  National  Bank  of  Austria, 
223 ;  rules  governing  circula- 
tion, 223-24  ;  required  to  estab- 
lish gold  payments,  227 ;  man- 
agement of  the  bank,  231 ;  rate 
of  discount,  232  ;  proposed  re- 
charter,  233. 

Ayr  Bank,  based  upon  landed 
'security,  142  ;  failure,  144. 


B 


Bank  Act  of  1844,  approved  by 
Sir  Robert  Peel,  120;  purpose 
of  the  limit  on  authorized  cir- 
culation, 121  ;  operation  of  the 
act  in  1847,  124  ;  failure  to  con- 


583 


584 


INDEX. 


tract  circulation,  126 ;  effect 
upon  use  of  credit  instruments, 
128  ;  intensifies  crisis  of  1847, 
488 ;  beneficial  effects  of  sus- 
pension, 490 ;  suspension  in 
l857>  497  ;  suspension  in  1866, 
505-7  ;  proposed  suspension  in 
1890,  520. 

Banking  currency,  theory  and 
purpose,  2-3  ;  should  not  be  im- 
prisoned within  fixed  limits,  6  ; 
does  not  add  to  existing  capital, 
8-10 ;  necessity  of  liquid  assets, 
14 ;  volume  should  be  regulated 
by  foreign  exchanges,  16-17 » 
growth  of  commercial  transac- 
tions, 554  ;  economy,  556  ;  evils 
of  government  interference, 
564-65  ;  promotes  deposit  bank- 
ing* 567-69;  advantages  over 
government  paper  money,  572- 

75-. 

Banking,  origin  in  Italy,  21  ; 
deposit  banking  established  by 
the  Jews,  23  ;  modern  system 
of  note  issue  not  developed 
until  seventeenth  century,  24  ; 
affected  by  economic  crises, 
457-59;  expansion  in  recent 
years,  556 ;  clearing  house  sta- 
tistics, 557-61. 

"Banking  Principle,"  distingu- 
ished from  currency  principle,  7. 

Bank  money,  used  by  Bank  of 
Hamburg,  195 ;  by  Bank  of 
Amsterdam,  259. 

Bank-notes,  different  from  money, 
2 ;  represent  commodities  in 
exchange,  3  ;  not  the  cause 
of  commercial  crises,  12  ;  should 
be  redeemable  in  coin,  13  ;  ad- 
vantages over  coin  in  Scotland, 
J57  j  preferred  to  coin  in  bank 
failures,  165  ;  promote  banking 
in  Prussia,  184-85 ;  not  the 
cause  of  crises,  465  ;  connection 
with  crisis  of  1810,  471. 

Bank,  origin  of  the  word,  22. 

Banque  du  Peuple,  of  Montreal, 
foundation,  390;  failure,  407. 

Baring  Brothers  and  Co.,  assist 
Bank  of  England  in  1839,  486  ; 
buy  French  securities  in  1847, 
491  ;  investments  in  Argentine 
Republic,  518;  failure  in  1890, 


520-22  ;  effect  of  failure  in 
United  States,  524. 

Bavaria,  provision  for  new  bank, 
204. 

Belgium,  proposes  Latin  Union, 
67,  255  ;  foundation  of  the  So- 
ciete  Generate,  251  ;  failure  of 
banking  on  landed  security, 
252 ;  The  National  Bank,  253  ; 
experience  in  Franco-Prussian 
war,  254 ;  organization  of  Na- 
tional Bank,  258. 

Biddle,  Nicholas,  becomes  Pres- 
ident of  Bank  of  the  United 
States,  302  ;  opposes  bringing 
the  bank  into  politics,  304  ;  dies 
insolvent,  307  ;  speculation  in 
cotton,  484. 

Bills  of  exchange,  useful  to 
Church  of  Rome,  24 ;  early  use, 

555- 

Black  Friday,  in  England,  505. 

Bland- Allison  Act,  373 ;  causes 
withdrawal  of  foreign  capital, 
526,  note  ;  offered  as  substitute 
for  Sherman  law,  541. 

Bolivia,  banking  in,  426. 

Bonaparte,  Napoleon,  decree  for 
a  national  bank,  51  ;  reorgan- 
izes Bank  of  France,  52  ;  effects 
of  abdication,  53  ;  effect  of  Ber- 
lin decree  on  trade,  470  ;  dis- 
asters in  Russia,  472. 

Bonds,  issues  of  1894,  544;  syn- 
dicate contract  of  1895,  546-49  ; 
issue  of  1896,  550. 

Boston,  banks  of,  early  institu- 
tions, 312  ;  competition  of  coun- 
try banks,  317 ;  Suffolk  re- 
demption system,  318 ;  conduct 
in  1861,  342. 

Bourse  of  Paris,  44,  note. 

Branch  banking.  Scotch  banks 
in  England,  154 ;  benefits  to 
Scotch  industry,  160 ;  success 
in  Canada,  409-11  ;  not  a  sub- 
stitute for  independent  banks, 
570 ;  advantages  where  there 
are  strong  competing  banks, 
571-72. 

Branch  drafts,  issued  by  Bank  of 
the  United  States,  301. 

Brazil,  banks  of,  418-20. 

British  India,  banking  in,  433- 
37- 


INDEX. 


585 


British  Linen  Company,  142. 
Brunswick,      Bank     of,      resists 

Imperial  banking  policy,  203. 
Bulgaria,  National  Bank  of,  284. 
Bullion  Report,  results  from  a 

motion   by   Mr.   Horner,    104 ; 

the  facts  proved,  106  ;   features 

of  the  report,  107-9. 
Burr,   Aaron,  secures  charter  of 

Manhattan  Company,  322. 
Business    men,    failure   to  grasp 

theory  of  currency,  105. 


Caisse  d^  Escompte  du  Com- 
merce, established  in  France, 
46  ;  embarrassed  by  demands 
of  Caloune  and  Necker,  48  ;  re- 
established in  1797,  50;  ab- 
sorbed by  Bank  of  France,  52. 

Call  loans,  not  available  in  a 
crisis,  14. 

Calonne,  diverts  Caisse  d'Es- 
compte  to  public  uses,  48. 

Cambodia,  banking  in,  450. 

Canadian  banking,  early  his- 
tory, 387-92  ;  proposals  for 
secured  circulation,  393  ;  mania 
for  free  banking,  394  ;  issue  of 
Dominion  notes,  395  ;  efforts 
for  secured  circulation,  396 ; 
extension  of  charters  in  1870, 
397;  advantages  of  recent  legis- 
lation, 399  ;  security  of  note 
issues,  399-400  ;  elasticity,  401- 
2  ;  redemption  agencies,  403 ; 
methods  of  examination,  404- 
5 ;  failures,  406-7  ;  reserves, 
408  ;  large  capital  and  branches, 
409-11. 

Canals,  development  in  Eng- 
land, 468;  Erie  Canal,  480; 
Suez  Canal,  510. 

Capital,  not  increased  by  note 
issues,  8-10 ;  regulated  by  law 
of  supply  and  demand,  19  ;  ac- 
cumulation after  a  crisis,  456  ; 
sinking  in  unproductive  enter- 
prises, 461  ;  effect  of  crises  upon 
distribution,  463-64  ;  with- 
drawal from  United  States  in 
1893,  526. 

Carlisle, .  John  G.,  proposes  new 
banking  system,  380-82 ;  pro- 


poses changes  in  national  bank- 
ing act,  383-85. 

Cash  credits,  creation  by  Royal 
Bank  of  Scotland,  162  ;  advan- 
tages to  Scotch  industry,  164. 

Central  America,  banks  of,  428- 
30- 

Chamberlain,  Hugh,  plan  for 
Land  Bank,  84. 

Chase,  Salmon  P.,  conference 
with  New  York  bankers,  349  ; 
interpretation  of  Act  of  1861, 
350  ;  issues  demand  notes,  351- 
52 ;  relies  upon  loans,  355 ; 
recommends  banking  system, 
357  »  purpose  to  pay  bank-notes 
in  specie,  361 ;  recommends 
taxation  of  state  notes,  363. 

Cheque  Bank,  established  in 
London,  128. 

Chile,  banking  in,  416-18. 

China,  banking  in,  441. 

Circulation,  regulations  govern- 
ing, Italy,  26,  28,  31,  32; 
France,  58,  61  ;  England,  93, 
113,  116,  118,  119,  121,  123; 
Scotland,  145,  159 ;  Germany, 
185,  189,  199-201  ;  Austria,  210, 
214,  220,  223,  224,  228  ;  Russia, 
245 ;  First  Bank  of  the  United 
States,  289 ;  Second  Bank  of  the 
United  States,  301  ;  Massachu- 
setts, 312-14;  New  York,  323, 
326 ;  Michigan,  328  ;  Louisiana, 
337  ;  Wisconsin,  341  ;  under  na- 
tional banking  system,  359,  366, 
369 ;  Canada,  393,  394,  395,  397, 
399-401,  408 ;  Mexico,  415 ; 
Chile,  416-18  ;  Brazil,  418  ;  Ar- 
gentina, 421  ;  Uruguay,  424  ; 
Venezuela,  425  ;  Colombia, 
426;  Ecuador,  426;  Haiti,  427; 
Salvador,  428  ;  Nicaragua,  429 ; 
Guatemala,  429 :  Martinique 
and  Guadeloupe,  430 ;  India, 
434,  435  ;  Japan,  437,  439  ;  Chi- 
na, 441  ;  Persia,  442  ;  Australia, 
443  ;  South  Africa,  448  ;  Co- 
chin-China,  450  ;  Algeria,  451  ; 
Senegal,  451. 

City  of  Glasgow  Bank,  suspen- 
sion in  1857,  149 ;  failure  in 
1878,  150;  effect  upon  unlim- 
ited liability,  151. 

Clay,    Henry,   denies    power   of 


586 


INDEX. 


Congress  to  create  a  bank,  293  ; 
supports  second  Bank  of  the 
United  States,  303-304  ;  resolu- 
tion to  censure  Jackson,  306. 

Clearing  houses,  shrinkage  of 
transactions  in  1894,  536  ;  trans- 
actions in  London,  558  ;  trans- 
actions in  United  States,  560- 
61. 

Clearing  House  certificates,  is- 
sues in  United  States,  512  ; 
effect  of  issues  in  1884,  518  ; 
issues  in  1893,  537. 

Cleveland,  Grover,  recommends 
currency  reform,  379  ;  efforts  to 
repeal  Sherman  law,  534  ;  sum- 
mons extra  session  of  Congress, 
535 ;  opposes  silver  compro- 
mise, 542  ;  recommends  retire- 
ment of  legal  tender  notes,  545  ; 
announces  syndicate  contract, 
546 ;  again  recommends  retire- 
ment of  legal  tender  notes, 

549- 

Cochin-China,  banking  system 
of,  450. 

Coin  reserve,  relation  to  note 
issues,  13  ;  the  English  system, 
14  ;  affected  by  withdrawals  of 
deposits,  15. 

Colombia,  banking  in,  425. 

Colonial  Bank  of  London,  dis- 
tribution of  circulation,  431. 

Compagnie  des  Indes,  develops 
from  the  bank  of  John  Law,  42  ; 
fall  of  the  stock  and  readjust- 
ment of  property,  45-46. 

Connecticut,  bank-notes  affected 
by  depreciated  foreign  paper, 

317. 
Consols,  origin,  92,  note  ;  effect 

of  conversion  in  1825,  475-76  ; 

conversion  in  1888,  518. 
Consorzio,  established  in  Italy  in 

1874,  29. 

"Cornering"  money,   not  prac- 
ticable under  free  banking,  19. 
Costa  Rica,  banking  system,  430. 
Cotton,   subject  of  Biddle's  spe-  | 

culations    484 ;     new    markets 

opened  in  1861,  501. 
Council   bills,      sale    by   Indian 

government  in  London,  436. 
Crawford,  William  H.,    supports 

Bank  of  the  United  States,  293. 


Credit,  gives  monetary  value  to 
gold  as  well  as  paper,  3  ;  use  of 
checks,  10 ;  seems  to  multiply 
capital,  10 ;  effect  on  crises, 
454-55  J  relation  to  note  issues, 
465  ;  economy  in  use  of  coin, 
556  ;  proportion  in  receipts  of 
Bank  of  France,  560 ;  propor- 
tion in  transactions  in  United 
States,  561  ;  promoted  by  a 
banking  currency,  568. 

Crimean  war,  effect  on  com- 
merce, 495,  498. 

Crises,  not  caused  by  bank-note 
issues,  12  ;  distinctive  classes, 
435  J  origin  and  development, 
454 ;  effect  on  merchandise 
markets,  456  ;  effect  upon  bank 
accounts,  457-58;  advantages 
of  liberal  accommodation,  459- 
60  ;  sinking  of  capital,  461-62  ; 
effect  upon  distribution  of 
wealth,  463  ;  influence  of  bank 
notes,  465  ;  early  history,  467 ; 
crisis  of  1783,  469-70;  of  1810, 
470-72 ;  of  1814-19,  472-75  ;  of 
1825,  475-79;  of  1837-39,  479- 
87  ;  of  1847,  487-91  ;  of  1857, 
492-99  ;  of  1864-66,  499-508  ;  of 
i873-79,  509-14;  of  1882-84, 
514-18 ;  of  1890,  518-23 ;  of 
1893,  524-54. 

Cuba,  Spanish  Bank  of,  431. 

Currency  principle,  distinguished 
from  banking  principle,  7 ; 
adopted  by  Sir  Robert  Peel, 
120 ;  ignores  use  of  credit,  122  ; 
failure  in  the  crisis  of  1844,  124  ; 
connection  with  convertibility 
of  notes,  127  ;  advocated  in 
Canada,  392-93. 


D 


Dallas,  Alexander  J.,  plan  for  a 
national  bank,  294. 

Darien  Company,  competition 
with  Bank  of  Scotland,  139. 

Delaware,  banking  in,  337. 

Demand  notes,  issued  by  Secre- 
tary Chase,  351  ;  cause  specie 
suspension,  352. 

Departmental  banks  in  France, 
foundation,  53  ;  suspension  of 
specie  payments,  57  ;  fusion 


INDEX. 


587 


with  Bank  of  France,  58  ;  op- 
erate without  deposits,  570. 

Deposits,  how  affected  by  crises, 
458. 

Discount  rate,  folly  of  attempt- 
ing to  maintain  a  uniform  rate, 
18  ;  method  of  Bank  of  France, 
71  ;  system  of  rapid  changes 
adopted  by  Bank  of  England, 
129  ;  changes  in  leading  banks, 
136. 

Dominion  notes  in  Canada,  issue 
authorized,  395  ;  required  in 
bank  reserves,  397  ;  may  be  de- 
manded at  banks,  401. 

Dutch  East  India  Company,  bor- 
rows from  Bank  of  Amsterdam, 
261. 


Eckels,  James  H.,  modifies  sys- 
tem of  bank  examinations,  375  ; 
recommends  new  basis  for 
banks  of  issue,  385. 

Ecuador,  banks  of,  426. 

Elasticity,  fluctuations  with  the 
seasons  in  Scotland,  156  ;  essen- 
tial benefit  of  a  banking  cur- 
rency, 566. 

England,  Bank  of,  exchanges 
gold  for  silver  with  Bank  of 
France,  67  ;  conditions  of  crea- 
tion, 78-81  ;  Paterson's  plan, 
81 ;  political  dangers,  84  ;  finan- 
cial dangers,  86-90  ;  monopoly 
of  note  issues,  93  ;  suspension 
of  specie  payments.  95-98  ;  ef- 
fect of  specie  suspension,  101  ; 
bullion  report,  106-9;  resolu- 
tions of  Mr.  Vansittart,  no; 
resumption  of  cash  payments, 
114  ;  monopoly  of  note  issues 
modified,  116;  adoption  of  cur- 
rency principle,  120;  failure 
of  currency  principle,  124  ; 
changes  in  discount  rate,  129  : 
the  "one  reserve  system,"  131 ; 
organization,  134  ;  increase  of 
discounts  in  1810,  471  ;  policy 
in  the  crisis  of  1825,  477  ;  issue 
of  £\  notes,  478  ;  supported  by 
the  Barings  in  1839,  486  ;  sus- 
pension of  Bank  Act  in  1847, 
490  ;  suspension  of  Bank  Act 


in  1857,  497  5  suspension  of 
Bank  Act  in  1866,  505-7;  dis- 
trust of  bank  abroad,  508  ;  well 
equipped  in  1875,  514  ;  manage- 
ment in  crisis  of  1890,  520-21. 

England,  economic  position  in 
1697,  87  ;  extension  of  interna- 
tional banking,  414,  note  ;  leg- 
islation against  stock  jobbing, 
467  ;  accommodation  bills,  468  ; 
contraband  trade  with  Ger- 
many, 471  ;  speculation  after 
fall  of  Napoleon,  473  ;  scarcity 
of  cereals  in  1818,  474  ;  specu- 
lation in  1825,  476;  railway 
extension,  488;  absorption  of 
capital  in  1857,  495  ;  joint  stock 
companies  in  1864,  502  ;  distrust 
of  British  credit  abroad,  508  ; 
crisis  of  1875,  514 ;  loans  in  Ar- 
gentine Republic,  518. 

Equivalent  fund,  made  the  basis 
of  Royal  Bank  of  Scotland,  141. 

Examination  of  banks,  method 
under  national  banking  law, 
375  ;  method  in  Canada,  404. 

Exchequer  bills,  effect  of  issue  in 
I793»  47°  >*  issue  of  1811,  472. 


Finlands  Bank,  249. 

j   Florida,  State  banking,  335-36. 

I  Foreign  exchanges,  influence  on 
redundancy  of  the  currency, 
1 6  ;  method  of  controlling,  17  ; 
method  of  management  by 
Bank  of  France,  71 ;  employed 
to  maintain  gold  standard  in 
Java,  447  ;  effort  to  control  by 
syndicate  con  tract,  547  ;  defects 
of  system,  548. 

France,  invaded  by  Italian  sub- 
sidiary coin,  34 ;  origin  of 
banking,  38 ;  the  Mississippi 
Company  and  the  plans  of  John 
Law,  39-45  ;  collapse  of  Law's 
system,  45  ;  ban  king  before  the 
Revolution,  46-49  ;  issue  of  the 
assignats,  49  ;  the  Caisse  des 
Comptes  Courants  and  Caisse 
d"1  Escompte^  50  ;  foundation  of 
the  Bank  of  France,  51  ;  the 
independent  departmental 
banks,  53-57 ;  effects  of  the 


588 


INDEX. 


double  standard,  66 ;  character 
of  the  Latin  Union,  67-70  ;  po- 
sition of  the  Bank  of  France, 
75-77  5  collapse  of  credit  in 
1805,  470  ;  effects  of  Napoleon's 
fall,  472;  abuse  of  credit  in 
1837,  486  ;  condition  in  1847, 
491  ;  benefits  of  gold  discover- 
ies, 500 ;  craze  for  stock  com- 
panies, 503 ;  speculation  in 
securities,  515. 

France,  Bank  of,  foundation,  51 ; 
reorganization  by  Napoleon, 
52  ;  resistance  to  monopoly  of 
the  bank,  56  ;  suspension  of 
specie  payments,  57  ;  assists 
railway  enterprises,  59;  influ- 
enced by  the  war  with  Ger- 
many, 60;  threatened  by  the 
Commune,  61  ;  assists  in  pay- 
ing war  indemnity,  62-65 ; 
embarrassed  by  variations  be- 
tween gold  and  silver,  66 ; 
changes  in  limit  of  circulation, 

72  ;  gold  and  silver  holdings, 

73  ;  government  of  the  bank, 
76 ;  proposed  renewal  of  char- 
ter, 77  ;  dangerous  position  in 
1805,    470 ;    expansion    of  dis- 
counts in   1810,    471 ;    fall  of 
metallic  reserve  in  1818,  475  ; 
strong  position  in    1825,   479 ; 
loans  to   Bank  of  England  in 
1839,  486 ;  purchases  of  gold  in 
1847,  491 ;    losses  of  gold  in 
1857, 498 ;  character  of  receipts, 
560. 

Franco-Prussian  war,  effect  on 
Bank  of  France,  60-65  ;  effect 
on  National  Bank  of  Belgium, 
253-55  J  cost,  509  ;  effect  on  Ger- 
many, 510 ;  effect  on  Bank  of 
England,  513  ;  effect  on  France, 

515- 

Free  banking,  outlines  of  the 
theory,  2  ;  prevents  the  corner- 
ing of  currency,  19  ;  does  not 
imply  absence  of  uniform  regu- 
lations, 20 ;  illustrated  by 
Swiss  system,  270. 

Free  banking  law  in  New  York, 
its  features,  326  ;  issues  by  indi- 
viduals, 327  ;  similar  laws 
adopted  in  Western  States, 
329  ;  failure  in  Wisconsin,  341. 


French  Revolution,  effect  0:1 
banking  in  Italy,  25  ;  on  credit 
in  France,  49  ;  upon  Bank  of 
England,  95-98. 


Gallatin,  Albert,  supports  Bank 
of  the  United  States,  292  ; 
opinion  of  specie  suspension, 

293. 

Geneva,  Bank  of,  268. 

Genoa,  Bank  of,  origin  and 
political  power,  22-23  ;  the  later 
bank  of  1844,  25  ;  unites  with 
National  Bank  of  Sardinia, 
26-27. 

Germany,  terms  of  the  French 
war  indemnity,  62-65 »  banks 
of  Prussia,  182-86 ;  banks  of 
the  German  States,  186-89 ; 
limiting  circulation  of  foreign 
bills,  189-91  ;  centralizing  pol- 
icy of  Prussia,  191-92  ;  adop- 
tion of  gold  standard,  193-94, 
Bank  of  Hamburg,  195  ;  unifi- 
cation of  banking  system,  196- 
97  ;  the  Imperial  Bank,  198-201 ; 
regulation  of  local  banks,  201- 
5  ;  popular  loans  of  the  Im- 
perial Bank,  207  ;  cost  of  war 
with  France,  509 ;  effects  of 
war  indemnity,  510;  specula- 
tion in  1873,  513. 

Godfrey,  Michael,  share  in  or- 
ganizing Bank  cf  England,  Si  , 
describes  business  of  the  bank, 

83. 

Gold,  derives  value  from  charac- 
ter as  money,  3  ;  variation  from 
coinage  ratio  in  France,  66; 
relation  to  paper  in  England, 
102  ;  relation  to  prices,  106 ; 
favored  as  the  standard  by  Ger- 
man cities,  193  ;  adopted  as  the 
standard  in  Germany,  194 ; 
recommended  as  standard  in 
Austria,  225  ;  importations  into 
Austria,  228  ;  accumulation  in 
Russia,  245  ;  certificates  in  Rus- 
sia,- 248 ;  maintenance  of  the 
standard  in  Holland,  263  ; 
method  of  maintaining  the 
standard  in  Java,  447 ;  with- 
drawals from  England  in  1818, 


INDEX. 


589 


474  ;  new  coinage  policy  in 
United  States,  482 ;  effect  of 
opening  American  mines,  493  ; 
disappearance  in  France,  1857, 
498  ;  benefits  of  new  supplies  in 
France,  500 ;  borrowed  by 
Bank  of  England  abroad  in 
1890,  521. 

Goschen,  Sir  George  J.,  adopts 
rule  of  rapidly  raising  discount 
rate,  129-30;  proposes  £\ 
notes,  131-32. 

Great  Britain,  see  England,  Scot- 
land, and  Ireland 

Greece,  banking  in,  early  history, 
277  ;  relations  with  the  govern- 
ment, 278 ;  economic  condition 
of  country,  278-79. 

Guadeloupe,  Bank  of,  430. 

Guaranteed  Banking  Act  in  Ar- 
gentina, 421  ;  results  in  specu- 
lation, 519. 

Guatemala,  banking  laws,  429. 

Guiana,  banks  of,  430-31. 


H 


Haiti,  banking  system  of,  427. 

Hamburg,  Bank  of,  history  and 
liquidation,  195  ;  failure  to  pre- 
vent crisis  of  1763,  468  ;  failure 
to  prevent  crisis  of  1857,  499. 

Hamilton,  Alexander,  deceived 
in  regard  to  lauded  security, 
34  ;  plan  for  Bank  of  the  United 
States,  288 ;  change  of  views 
regarding  landed  security,  289, 
note. 

Holland,  banking  in,  Bank  of 
Amsterdam,  259-61  ;  Bank  of 
the  Netherlands,  262-63. 

Hongkong  and  Shanghai  Bank- 
ing Corporation,  441. 

Horner,  Francis,  moves  for  an 
inquiry  regarding  currency  and 
exchanges  in  England,  104 ; 
prepares  Bullion  Report,  105  ; 
resolutions  defeated  in  Parlia- 
ment, no. 

Houblon,  Sir  John,  first  Governor 
Bank  of  England,  82  ;  stays  a 
panic,  86. 

Hungary,  demands  payments 
from' National  Bank  of  Austria, 
222 ;  relations  with  Austro- 


Hungarian  Bank,  223 ;  adop- 
tion of  gold  standard,  225 ; 
Separatist  feeling  affects  bank 
charter,  233. 


Illinois,  failure  of  State  banks, 
336-37- 

Imperial  Bank  of  Germany,  cre- 
ated from  Royal  Bank  of 
Prussia,  196  ;  organization,  197; 
rules  governing  circulation, 
199-201  ;  rate  of  discount,  201; 
gold  holdings,  206 ;  relations 
with  popular  banks,  207. 

Imperial  Ottoman  Bank,  organi- 
zation, 281  ;  effects  of  panic  on 
circulation,  282. 

Independent  Treasury  system, 
outgrowth  of  conflict  over 
Bank  of  the  United  States, 
308 ;  modified  in  1861,  349 ; 
fails  to  prevent  specie  suspen- 
sion, 353. 

Indemnity  of  France  to  Ger- 
many, share  of  Bank  of  France 
in  its  payment,  62-64  >  effect 
on  securities,  65-66. 

India,  early  banking  history,  433  ; 
adoption  of  government  paper 
currency,  435 ;  effect  of  sus- 
pending free  coinage,  436  ;  re- 
port of  Currency  committee, 

533- 

Indiana,  success  of  State  Bank, 
338  ;  the  new  bank,  339. 

Interest,  opposed  among  Chris- 
tians, 23  ;  paid  on  notes  of  sus- 
pended banks  in  Scotland,  140  ; 
allowance  on  deposits  benefits 
Scotch  people,  159-62  ;  paid  on 
notes  of  suspended  banks  in 
Canada,  400. 

Ireland,  depreciation  of  currency 
considered  by  Parliamentary 
committee,  103  ;  economic  for- 
tunes, 167  ;  savings  of  the  peo- 
ple, 181. 

Ireland,  Bank  of,  foundation, 
171  ;  monopoly  of  banking, 
173 ;  circulation,  180. 

Ireland,  banking  in,  early  private 
banks,  168-70 ;  foundation  of 
Bank  of  Ireland,  171;  suspen- 


590 


INDEX. 


sion  of  cash  payments,  172 ; 
the  Provincial  Bank,  174;  Na- 
tional Bank,  175  ;  Tipperary 
Bank,  177  ;  Banking  Act  of 
1845,  178-80. 

Italy,  early  banking  history,  22- 
25  ;  National  Bank  of  the  King- 
dom, 27  ;  policy  of  unity  in 
banking,  28  ;  corruption  among 
officials,  30  ;  flight  of  subsidi- 
ary money,  34 ;  present  eco- 
nomic condition,  35  ;  popular 
banking,  36-37  ;  participates  in 
Latin  Union,  68  ;  feels  crisis  of 
1893,  525- 

Italy,  National  Bank  of,  created 
by  Victor  Emanuel,  27 ;  loans 
to  government,  29  ;  illegal  cir- 
culation, 30 ;  absorbs  National 
Bank  of  Tuscany  and  Tuscan 
Bank  of  Credit,  31  ;  new  or- 
ganization in  1893,  32  ;  relations 
with  the  Roman  Bank,  35. 


Jackson,  Andrew,  criticises  Bank 
of  the  United  States,  301  ;  de- 
termines to  suspend  deposits  in 
bank,  305 ;  protests  against 
Senate  resolutions,  306  ;  issues 
specie  circular,  481. 

James  I.,  policy  of  raising  taxes, 
80. 

Japan,  early  banking  history, 
437-38;  the  Bank  of  Japan, 
439;  effect  of  silver  standard, 
440. 

Java,  Bank  of,  organization,  446  ; 
method  of  maintaining  gold 
standard,  447. 

Jay  Cooke  &  Co.,  failure  of,  511. 

Jefferson,  Thomas,  policy  towards 
Bank  of  the  United  States,  291. 

Joint  stock  banks,  discovered  to 
be  legal  in  England,  1 15  ;  first 
bank  established  in  London, 
117  ;  lack  of  coin  reserve,  130. 

Joint  stock  companies,  effect  on 
production,  462,  note ;  variety 
of  objects  in  England  in  1825, 
476 ;  expansion  in  England  in 
1834,  485;  effect  of  Limited 
Companies'  Act,  502  ;  expansion 
in  France,  503  ;  absorption  of 


capital  in  Prussia,  510  ;  specu- 
lation in  Vienna,  513  ;  develop- 
ment in  France  up  to  1882, 
515  ;  expansion  in  England  up 
to  1890,  518. 


K 


Kentucky,  banking   in,  330-31  ; 

relief  laws,  332. 
King,  Lord,  issues  a  circular  to 

tenants  requiring  payments  in 

coin,  in. 

L 

Labor,  employed  from  past  sav- 
ings, 455  ;  affected  by  crises, 

463- 

Land  Bank,  projected  by  Cham- 
berlain, 84  ;  collapses,  85. 

Land,  not  a  proper  security  for 
bank-notes,  15  ;  fails  in  Eng- 
land, 87  ;  leads  to  collapse  of 
Ayr  Bank,  143  ;  causes  failure 
in  Ireland,  168-169 ;  failure  as 
security  in  Belgium,  252  ;  fail- 
ure in  Paraguay,  423  ;  evil  re- 
sults in  Australia,  444~45>  552  ; 
failure  in  France,  573. 

Latin  America,  banks  of,  412-13. 

Latin  Union,  conference  of  1893 
regarding  redemption  of  Italian 
subsidiary  coins,  34;  originated 
in  a  proposition  from  Belgium, 
67,  255 ;  attempts  to  maintain 
circulation  of  silver,  68  ;  makes 
gold  primary  money,  68  ;  limi- 
tation of  silver  coinage,  70; 
effect  of  the  Union  upon  Bank 
of  France,  71  ;  exchange  of 
minor  coins,  256. 

Law,  John,  foundation  of  the 
Compagnied*  Occident,  39  ;  con- 
tracts with  French  govern- 
ment, 41  ;  continued  issue  of 
stock,  42  ;  collapse  of  the  sys- 
tem, and  attack  upon  Law,  45. 

Legal  tender,  in  Italy,  26,  27,  32  ; 
in  France,  44,  57,  60 ;  in  Eng- 
land, 98,  118;  in  the  German 
States,  189 ;  in  German  Empire, 
206;  in  Austria,  216,  221;  in 
United  States,  353 ;  in  New 
South  Wales,  445  ;  in  Algeria, 
451- 


INDEX. 


591 


Legal  Tender  Notes,  President 
Cleveland  recommends  retire- 
ment, 545,  549- 

Lidderdale,  William,  skilful  man- 
agement of  Bank  of  England  in 
1890,  520. 

Limited  liability,  its  adoption 
in  Great  Britain  in  1858,  151 ; 
modified  in  1879,  152. 

London  clearing  house  transac- 
tions, 558. 

Louisiana,  banking  system,  337. 


M 


Machinery,  influence  on  over- 
production, 462-63. 

Macleod,  Prof.  Henry  Dunning, 
demonstration  that  value  is  not 
an  inherent  quality,  3  ;  theory 
of  credit  and  banking,  8-9 ; 
theory  of  discounting,  17. 

Madison,  James,  suggests  a  na- 
tional bank,  295 ;  change  of 
constitutional  views,  296. 

Maine,  banking  laws,  315  ;  specie 
in  banks  in  1861,  340. 

Marshall,  John,  decision  regard- 
ing national  bank,  296. 

Martinique,  Bank  of,  430. 

Massachusetts,  Land  and  Manu- 
facturing Bank,  286 ;  early 
banking  laws,  312  ;  banks  main- 
tain specie  payments,  313 ;  in- 
crease in  banks  prior  to  panic 
of  1837,  314 ;  Suffolk  banking 
system,  317-21. 

McCulloch  vs.  Maryland,  decided 
by  Marshall,  296. 

McCulloch,  Hugh,  appointed 
Comptroller  of  the  Currency, 
361 ;  recommends  taxation  of 
State  bank-notes,  363 ;  recom- 
mends resumption,  367. 

Melbourne,  Bank  of,  446. 

Mexico,  banks  of,  414-16. 

Michigan,  wildcat  banking  in, 
328-29. 

Mississippi,  failure  of  State 
banks,  334-35. 

Mississippi  Company,  see  Com- 
pagnie  des  Indes. 

Missouri,  banks  of,  337-38. 

Monetary  conferences,    in  tern  a- 


national,  in  1878,  531  ;  in  1881, 

531  ;  in  1892,  532. 
Montreal,    Bank   of,   foundation, 

387 ;    issues    provincial   notes, 

395  ;  favors  secured  circulation, 

396. 
Morgan,   J.   Pierpont,   syndicate 

contract   with    Treasury,    546- 

48 ;    subscription    to    loan   of 

1896,  550. 
Morris,  Robert,  founds  Bank  of 

North  America,  287. 
Mortgages  as  security,  see  Land. 


N 


Nassau  Bank,  431. 

National  banking  system  of  the 
United  States,  comparison  with 
State  systems,  344-46 ;  origi- 
nates in  difficulties  of  the  Treas- 
ury, 349-57  ;  Secretary  Chase's 
plans,  358  ;  rules  governing  cir- 
culation, 360;  objections  met 
by  Comptroller  McCulloch, 
362  ;  taxation  of  State  notes, 
363-64  ;  changes  in  circulation, 
365-67  ;  resumption  of  specie 
payments,  367-69 ;  extension 
of  charters,  371  ;  effect  of  Bland 
Act  and  Sherman  Act,  373  ;  re- 
demptions, 374  ;  examinations, 
375  ;  efforts  for  a  new  system, 
377-85;  failures  in  1893,  530, 
535;  expansion  of  banking  cap- 
ital, 539  ;  effect  of  the  reserve 
system,  539-40 ;  changes  in 
discounts  and  deposits,  543. 

Necker,  exacts  secret  loans  from 
Caisse  d1  Escompte,  48. 

Netherlands,  Bank  of,  succeeds 
Bank  of  Amsterdam,  261;  meth- 
od of  maintaining  the  gold 
standard,  263. 

New  Brunswick,  banking  in,  ear- 
ly charters,  391  ;  brought  under 
Canadian  law,  396;  branches, 
410. 

New  England  banks,  illustrated 
by  Massachusetts  system,  312  ; 
legislation  in  Maine  and  Ver- 
mont, 312  ;  in  Rhode  Island, 
316  ;  Suffolk  system,  317-21  ; 
suspension  of  1861,  321  ;  effect 
on  circulation  and  specie  re- 


592 


INDEX. 


serves,     339-40  ;      comparison 
with  other  systems,  344-45. 

New  Hampshire,  batiks  retain 
their  specie,  340. 

New  South  Wales,  modification 
of  the  banking  law,  445  ;  bank- 
notes made  legal  tender,  553. 

New  York  banks,  advances  to 
Treasury  in  1861,  349  ;  suspend 
specie  payments,  352  ;  resump- 
tion of  specie  payments  in 
1838,  483  ;  restrict  discounts  in 
1893,  53°- 

New  York,  early  banking  char- 
ters,  322  ;    adopts  safety  fund 
plan,  323  ;  reasons  for  failure,    j 
325 ;    free    banking   act,    326 ;    j 
issues  by  individuals,  327. 

Nicaragua,  banks  of,  428-29. 

Norway,  banking  system,  267. 

Nova   Scotia,    banking  in,  early   i 
charters,  391  ;    brought  under 
Canadian  law,  396. 


O 


Ohio,  State  Bank  of,  328. 

Options,  introduced  into  France 
by  John  Law,  42. 

Orange  River  Free  State,  Na- 
tional Bank  of,  450. 

Overend,  Gurney  &  Co.,  conduct 
in  crisis  of  1825,  478 ;  suspen- 
sion in  1866,  505. 

Overstone,  Lord,  advocates  cur- 
rency principle,  120. 


Palmstruch,  founder  of  Bank  of 
Sweden,  264. 

Paper  currency,  losses  by  wear, 
383,  note. 

Paper  money,  in  Italy,  29,  33  ;  in 
France,  49 ;  in  the  German 
states,  204  ;  in  Austria,  210-18  ; 
in  Russia,  235-40;  in  United 
States,  351-53  ;  in  Canada,  387, 
395,  397  ;  in  Brazil,  419  ;  in  In-  | 
dia,  435 ;  in  Japan,  437 ;  in 
China,  441  ;  differs  from  bank- 
note issues,  564 ;  absence  of 
quick  assets,  573-75. 

Paraguay,  banking  in,  422-23. 

Paterson,  William,  plan  for  Bank 


of  England,  81  ;  organizes  Da- 
rien  Company,  139. 

Peel,  Sir  Robert,  supports  re- 
sumption by  Bank  of  England, 
113  ;  adopts  currency  principle, 
1 20  ;  admits  partial  failure  of 
Act  of  1844,  124. 

Pennsylvania,  Bank  of,  287 ; 
banking  mania,  473. 

Persia,  Imperial  Bank  of,  442. 

Peru,  banking  system,  426-27. 

Philippine  Islands,  banking  in, 
452. 

Pitt,  William,  demands  upon 
Bank  of  England,  95-^97. 

Popular  banks,  relations  with 
banks  of  Naples  and  Sicily,  36 ; 
relations  with  German  Imperial 
Bank,  207  ;  in  Russia,  241-43. 

Porto    Rico,    Spanish    Bank    of, 

43 r- 

Portugal,  Bank  of,  276. 

Prices,  how  affected  by  credit 
cycles,  454  ;  advanced  by  Ber- 
lin decree,  470  ;  affected  by  fall 
of  Napoleon,  472. 

Protective  tariff,  effect  on  crises, 
461,  note. 

Provincial  Bank  of  Ireland,  174. 

Prussia,  Bank  of,  origin,  183  ;  im- 
portance of  circulating  notes, 
185  ;  accumulates  stock  of  gold, 
195  ;  converted  into  Imperial 
Bank,  196  ;  contest  with  Bank 
of  Brunswick,  203  ;  refuses 
speculative  paper  in  1873,  513. 

Prussia,  law  regarding  circulation 
of  foreign  bills,  189 ;  adopts 
centralizing  policy  in  banking, 
191. 


Railways,  aided  by  Bank  of 
France,  59  ;  economic  benefit 
to  the  community,  463,  note  ; 
mania  in  1847,  488 ;  mileage  up 
to  1857,  493  ;  new  method  of 
financing,  502  ;  absorption  of 
capital  iip  to  1873,  509 ;  loss 
of  earnings  in  1894,  536. 

Redemption  in  coin,  its  import- 
ance in  a  banking  currency,  13  ; 
related  to  stable  system  of  val- 
ues, 15-17. 


INDEX. 


593 


Redemption  of  bank-notes,  meth- 
od under  national  banking 
system,  374-75  ;  changes  recom- 
mended by  Secretary  Carlisle, 

384. 

Redemption  of  United  States 
notes,  545,  549. 

Relief  laws,  in  Kentucky,  332. 

Restriction  of  cash  payments  in 
England,  98  ;  effect  upon  bank- 
notes, 101-4 ;  brought  to  an 
end,  114. 

Resumption,  recommended  by 
Secretary  McCulloch,  367  ;  sup- 
ported by  national  banks,  368. 

Reunion,  Bank  of,  452. 

Rhode  Island,  law  for  recovery 
of  bank  debts,  316  ;  agency  of 
Suffolk  redemption  system, 
318. 

Roman  Bank,  foundation,  28 ; 
exceeds  legal  circulation,  30  ; 
compelled  to  liquidate,  31,  35. 

Roumania,  banking  in,  283-84. 

Royal  Bank  of  Scotland,  created 
from  the  Equivalent  Fund,  141 ; 
establishes  branch  in  London, 
154 ;  establishes  cash  credits, 
162. 

Russia,  Bank  of,  close  relations 
with  the  state,  235  ;  origin  and 
capital,  238  ;  plans  for  specie 
resumption,  240 ;  revision  of 
charter,  241  ;  rules  governing 
circulation,  244-45 ;  steps  to- 
wards gold  payments,  246-48. 

Russia,  paper  money  issues,  236  ; 
efforts  to  restore  specie  pay- 
ments, 237-40  ;  new  industrial 
policy,  243  ;  steps  towards  gold 
standard,  246-48  ;  loan  to  Bank 
of  France  in  1847,  491  ;  ex- 
change of  silver  with  Bank  of 
France  in  1861,  501  ;  loans 
to  Bank  of  England  in  1890, 
52i. 

Russo-Chinese  Bank,  442. 


Safety  fund  system,  adoption  in 
New  York,  323  ;  failure  and  its 
causes,  324-25. 

Salvador,  banks  of,  428. 

Sardinia,  National  Bank  of,  cre- 
38 


ated  in  1849,  26  ;  reorganizes  as 
National  Bank  of  Italy,  27. 

Scotch  banking  system,  its  early 
history,  138-43";  strength  dur- 
ing specie  suspension,  145 ; 
failure  of  the  Western  and  City 
of  Glasgow  Banks,  146-50 ; 
limited  liability,  150-52  ;  pro- 
posal to  abolish  Scotch  note 
issues,  153 ;  advantages  of 
Scotch  banking,  155-66. 

Scotland,  Bank  of,  foundation, 
139  ;  increase  of  capital,  144 ; 
application  for  limited  liability, 
152  ;  establishes  branch  in  Lon- 
don, 154. 

Scotland,  origin  of  accommoda- 
tion bills,  468  ;  failure  of  West- 
ern Bank,  497  ;  failure  of  City 
of  Glasgow  Bank,  514. 

Securities,  introduced  in  France 
by  John  Law,  41  ;  effect  of 
French  indemnity  loan  upon 
price,  65-66 ;  tendency  to  re- 
turn to  country  of  origin,  229 ; 
effect  of  official  sales  in  France, 
475  ;  new  method  of  financing, 
502  ;  extension  in  France,  515  ; 
effect  on  trade  statistics,  516; 
American,  held  in  Europe,  526  ; 
shrinkage  in  dividends  in  1895, 

529- 

Senegal,  Bank  of,  451. 

Servia,  National  Bank  of,  284-85. 

Sherman  law,  effect  on  bank  cir- 
culation, 373  ;  efforts  of  Presi- 
dent Cleveland  to  repeal,  524  ; 
effect  on  gold  exports  and 
Treasury  reserve,  527  ;  repeal- 
ing bill,  540  ;  action  in  House, 
541  ;  repeal,  542. 

Sicily,  Bank  of,  foundation,  28  ; 
exceeds  legal  circulation,  30 ; 
subject  to  law  of  1893,  33  ;  as- 
sists people's  banks,  37. 

Silver,  fluctuations  embarrass 
Bank  of  France,  66  ;  causes  the 
formation  of  Latin  Union,  68  ; 
change  in  the  commercial  ratio, 
69 ;  limitation  of  coinage,  70 ; 
effect  upon  circulation  of  Bank 
of  France,  72  ;  disappears  from 
England,  101  ;  principal  me- 
tallic stock  of  Germany,  192  ; 
standard  of  the  Bank  of  Ham- 


594 


INDEX. 


burg,  194 ;  place  in  Austrian 
circulation,  226-28 ;  deprecia- 
tion in  Spain,  275  ;  causes  dis- 
turbance in  Servia,  285  ;  effect 
of  suspending  free  coinage  in 
India,  436  ;  effect  upon  Japan- 
ese exports,  440 ;  monetary 
conferences,  530-33  ;  suspen- 
sion of  free  coinage  in  British 
India,  533. 

Singapore,  competition  with  Bank 
of  Reunion,  452. 

Small  notes,  advantages  to  Scotch 
industry,  158. 

South  African  Republic,  National 
Bank  of,  449. 

South  America,  banking  in,  416- 

430- 
South  Sea  Company,  contest  with 

Bank  of  England,  90. 
Spain,    Bank  of,    early    history, 

273  ;  extension  of  charter,  274  ; 

subordination      to       Treasury, 

275- 

Spain,  economic  condition  of, 
274-76.- 

Spanish  Bank  of  the  Philippines, 
452. 

Specie  circular,  issued  by  Jack- 
son, 481. 

Springer,  William  M.,  reports 
banking  bill,  382. 

Standard  Bank  of  South  Africa, 

449- 

State  banks,  suspension  of  pay- 
ments in  1814,  293  ;  notes  held 
exempt  from  federal  taxation, 
298,  note ;  compelled  to  re- 
sume, 298 ;  variety  of  systems 
in  the  United  States,  311 ;  Mas- 
sachusetts, 312-15  ;  other  New 
England  States,  315-17 ;  New 
York,  322-27;  Ohio,  328; 
Michigan,  328  ;  other  western 
states,  329  ;  Kentucky,  331-32  ; 
other  southern  states,  333-37; 
Indiana,  338;  effects  of  the 
Civil  War  upon  the  system, 
339-41 ;  advantages  and  disad- 
vantages, 343-46 ;  limited  cir- 
culation, 347  ;  advances  to  the 
Treasury  in  1861,  349;  suspend 
specie  payments,  352  ;  subject- 
ed to  tax  on  circulation,  364  ; 
proposed  revival,  377. 


Stockholm  Bank,  issues  trans- 
port notes,  25. 

Stock  exchange  clearing  houses, 
562-63. 

Stock  jobbing,  acts  against,  467  ; 
extension  to  American  colonies, 
287. 

St.  Thomas,  Bank  of,  431. 

Suez  canal,  510. 

Suffolk  system  of  redemption, 
origin,  318;  effect  of  operation, 
319  ;  rivalry  of  Bank  of  Mutual 
Redemption,  320  ;  economy  of 
system,  321,  374. 

Surinam,  Bank  of,  431. 

Surplus,  distribution  among  the 
States,  482. 

Sweden,  banking  in,  264-65. 

Switzerland,  legislation  regarding 
silver,  67  ;  urges  the  gold  stan- 
dard, 68  ;  limits  silver  coinage, 
70 ;  early  banks,  268 ;  forma- 
tion of  Concordat,  270 ;  pro- 
posed state  bank,  271. 

Sydenham,  Lord,  supports  cur- 
rency principle,  393. 

Syndicate  contract  of  1895,  546- 
"49- 


Taney,  Roger  B.,  changes  method 
of  depositing  public  funds,  306. 

Tariff,  influence  upon  crises,  461, 
note  ;  connection  with  crisis  of 
1857,  494,  note. 

Taxation,  national  banks  exempt 
from  special  taxes  by  States, 
296  ;  federal  taxation  of  State 
notes,  298  ;  tax  of  1865  on  State 
notes,  363  ;  effect  on  circula- 
tion, 364  ;  repeal  recommended 
by  Democratic  convention, 
3.77  ;  favored  by  Secretary  Car- 
lisle, 380;  tax  fails  to  check 
emergency  issues  in  1893,  538. 

Tennessee/State  Bank,  337. 

Thiers,  manages  French  war  in- 
demnity, 63  ;  opinion  of  Bank 
of  France,  75,  note. 

Tipperary  Joint  Stock  Bank, 
foundation,  177 ;  peculations 
of  John  Sadlier,  178. 

Turkey,  banking  in,  281-83  ;  fall 
of  prices,  525. 


INDEX. 


595 


u 


Ultramarine  Bank,  452. 

Union  Generate,  failure  of,  517. 

United  States,  suspension  of  spe- 
cie payments  in  1814,  474 ; 
crisis  of  1837,  479-83  ;  exports 
of  1847,  487  ;  railway  extension 
in  1857,  493  ;  changes  in  circu- 
lation, 495  ;  crisis  of  1857,  496  ; 
effect  of  civil  war,  500 ;  crisis 
of  1873,  511-12  ;  crisis  of  1884, 
517;  crisis  of  1893,  524-50; 
transactions  of  clearing  houses, 
560  ;  proportion  of  credit  in- 
struments, 561  ;  advantage  of 
banks  over  the  Treasury,  574- 

75- 

United  States,  Bank  of,  origin, 
287 ;  relations  with  Treasury, 
289-91  ;  expiration  of  charter, 
292  ;  plans  for  second  bank, 
294-95  ;  constitutional  opposi- 
tion to  the  new  bank,  296  ;  case 
of  McCulloch  vs.  Maryland, 
297  ;  specie  resumption,  298 ; 
branch  drafts,  301  ;  arouses 
hostility  of  Jackson,  302-4 ; 
removal  of  the  deposits,  306 ; 
origin  of  sub-Treasury  system, 

307-9- 
United  States,    banking    in,   see 

United  States,    Bank  of,  State 

banks,   and   national  banking 

system. 
Uruguay,  banking  in,  423-25. 


V 


Van  Buren,  Martin,  recommends 


safety  fund  system,  322  ;  colls 
extra  session  of  Congress,  483. 

Vansittart,  opposes  bullion  re- 
port, no. 

Venezuela,  banking  law,  425. 

Venice,  Bank  of,  transfer  office 
of  the  national  debt,  21  ;  de- 
posit bank  created,  22. 

Vermont,  banking  in,  315 ;  en- 
courages Suffolk  system,  320. 

Victoria,  banking  laws  of,  443  ; 
estimated  wealth  in  1892,  551. 

Vienna,  Bank  of,  creation  and 
failure,  210. 

Vienna,  speculation  in  1873,  513. 


W 

Webster,  Daniel,  favors  creation 
of  a  commercial  bank,  294 ; 
secures  amendment  of  bank 
bill,  296;  opinion  in  favor  of 
branch  drafts,  301. 

Western  Bank  of  Scotland,  adopts 
policy  hostile  to  that  of  other 
Scotch  banks,  147  ;  failure  and 
heavy  losses,  148-49  ;  effect  of 
failure,  497. 

West  Indies,    British,   banks  of, 

430-31. 

Wilson,  William  L.,  bill  to  repeal 
Sherman  Law,  540  ;  bill  to  au- 
thorize gold  bonds,  546. 

Wisconsin,  failed  banks,  330; 
decline  in  southern  securities, 
340-41. 

Witte,  Russian  finance  minister, 
new  organization  of  Bank  of 
Russia,  241-44. 


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